Key takeaways

  • Working capital loans are a type of short-term business loan designed to help businesses cover their regular operating expenses
  • Working capital is calculated by subtracting current liabilities from current assets
  • There are many types for working capital loans, including term loans, lines of credit, business credit cards, invoice financing, merchant cash advances and SBA loans

Every business needs cash that it can use to cover day-to-day operating expenses like wages, inventory purchases and rent. A working capital loan could be the answer if you need to borrow money to cover these costs. But make sure you know the benefits and drawbacks before applying.

What is a working capital loan?

A working capital loan is a short-term business loan intended to help a company make sure it has enough cash to pay for its regular operating expenses. They usually have quick funding and short repayment periods. They’re not designed for larger, more long-term purchases.

While some loans are designed explicitly for working capital loans, some types can be used for working capital or long-term financing. These options include term loans and business lines of credit.

How to calculate working capital

Working capital is the amount of money your company has to deal with its daily operating costs and short-term expenses. To calculate working capital and to see how well you’re able to meet your financial obligations, you subtract your current liabilities from your current assets:

Current assets — current liabilities = working capital

Note that it only looks at current assets and liabilities. Long-term assets and debts aren’t included because working capital is concerned with short-term costs. Positive working capital indicates that you have enough money to pay the bills. Negative working capital is a bad sign in most cases.

You can also use the working capital ratio to measure your liquidity and financial health. To do that, divide your current assets by your current liabilities:

Current assets / current liabilities = working capital ratio

Ratios greater than 1 indicate that you have enough money to pay the bills. Depending on your industry, you may aim for a working capital ratio between 1.2 and 2.

How does a working capital loan work?

Working capital loans work similarly to many other types of loans. Your business can borrow money either as a lump sum or as a line of credit. You then pay that money back — typically over a short period of six months to 24 months.

In some cases, the lender will ask for bimonthly, weekly or even daily payments. There are also unique loan types, like merchant cash advances, that make repayment automatic through a percentage of your sales.

You can consider a working capital loan to help bridge the gap during a seasonal business’s slow months, to take advantage of bulk order discounts from suppliers, to finance a short-term project or avoid a cash crunch.

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Bankrate insight
You’ll need good-to-excellent credit to see the lowest interest rates on working capital loans. But if you don’t have time to build credit, there are working capital loans for bad credit. Some lenders are willing to work with business owners with credit scores as low as 500.

Types of working capital loans

There are many working capital loans, each with different features and designed for different situations.

Types of working capital loans Description Key details
Term loans Traditional loans that offer lump sums upfront with a regular repayment schedule.
  • Lump sum disbursement
  • Fixed payments
  • Longer repayment terms
SBA loans Government-backed loans with large limits and easier qualification requirements.
  • Large loan limits, upward of $5 million
  • Simpler qualification requirements
  • Slow approval and funding
Business lines of credit Revolving line of credit. Draw funds multiple times as needed and only pay interest on your balance.
  • Flexible access to cash
  • May have maintenance fees
Business credit cards Revolving line of credit. Designed for everyday purchases. No interest if paid in full. May offer rewards or perks.
  • Helps build business credit
  • Low maximum rates
Invoice financing/factoring Loans secured by the value of your invoices. Get a percentage of the amount you’re owed without waiting for payment.
  • Borrowing limit dependent on your invoiced amounts
  • Lose a percentage of what you’re owed
  • Automatic repayment when invoice is paid
Merchant cash advances Short-term loans to help cover immediate expenses. Automatic repayment through a percentage of your sales.
  • Cover emergencies and cash shortfalls
  • Automatic repayment
  • High rates and fees

Where to get a working capital loan

Many different lenders offer working capital loans. Banks and credit unions are often the first place people look but some specialized online lenders offer loans. You might also consider an SBA loan if you need to borrow large amounts. Compare different lenders and their features before you choose a working capital loan.

Banks and credit unions

Banks and credit unions often work with businesses to offer financing. They tend to have lower interest rates and fees than online lenders and can often offer longer repayment terms. But they don’t approve and fund loans as quickly as online lenders.

While bank loans, like term loans or business lines of credit, can be useful for working capital, they may not offer some types of alternative financing, like merchant cash advances or invoice factoring, making them a poor choice if you’re looking for that type of loan.

Compare banks that offer working capital loans

Many online lenders offer working capital loans. Here are three of the top working capital lenders on the market.

Lender Working capital loans Top features
Bank of America
  • Business lines of credit
  • Term loan
  • Business credit card
  • SBA loans
  • Terms of 12 to 60 months
  • Loans start at $10,000
  • Two years in business and $100,000 in annual revenue required
Wells Fargo
  • Business lines of credit
  • Credit lines from $5,000 to $1 million
  • Requires a credit score of 680
  • Interest-only monthly payments
PNC Bank
  • Business lines of credit
  • Credit lines from $20,000 to $3 million (secured only for lines over $100,000)
  • Interest-only monthly payments

Online lenders

Online lenders are typically nonbank companies that operate solely on the internet. They offer various types of loans and financing. The application process happens online, so you don’t have to visit a branch or speak to a lender.

These companies often move much faster than banks and credit unions. In some cases, you can get approved for a loan in minutes and see the funds in your account the next day. Many also offer alternative financing, such as invoice factoring. But that speed and flexibility come at a cost. Unless you have stellar credit, you’ll see higher rates and fees. Loan limits are also typically lower.

Compare online lenders that offer working capital loans

Consider these lenders if you’re looking for an online working capital loan.

Lender Working capital loans Top features
OnDeck
  • Term loan
  • Line of credit
  • Repayment terms up to 24 months
  • Loans from $5,000 to $250,000
  • Credit lines from $6,000 to $100,000
  • Daily or weekly payments
  • 625 credit score, one year in business, $100,000 in annual revenue required
National Funding
  • Term loan
  • Repayment terms of 4 to 24 months
  • Loans from $5,000 to $500,000
  • Uses factor rates rather than interest rates
  • Six months in business, $250,000 in annual revenue required
SMB Compass
  • Line of credit
  • Term loan
  • Inventory financing
  • Invoice financing
  • Loans from $25,000 to $5 million
  • Lines of credit from $10,000 to $5 million
  • Secured and unsecured options
  • One year in business required for inventory financing
Accion Opportunity Fund
  • Term loan
  • Loans from $5,000 to $250,000
  • Rates from 5.99% to 18.99%
  • Business coaching and assistance available
Triton Capital
  • Term loans
  • SBA loans
  • Repayment terms from 6 to 24 months
  • Loans from $10,000 to $250,000
  • 600 credit score, $350,000 in annual revenue required for term loan

SBA loans

The Small Business Administration is a government entity that helps support small businesses across the US. One way it does this is through the SBA loan program. The SBA guarantees loans to businesses, helping them borrow larger amounts with less stringent eligibility requirements.

SBA loans can be great for companies that need a lot of cash, but they often involve a lot of paperwork, meaning they have long approval and funding timelines.

Compare SBA loans for working capital

If you’re considering an SBA loan to help with working capital, you have a few loan types to choose from.

Type of SBA Loan Features
SBA 7(a) loans
  • Borrow up to $5,000,000
  • Repayment terms of up to 10 years
  • No collateral required for loans up to $25,000
SBA Express
  • Term loan or line of credit with SBA approval time of 36 hours
  • Borrow up to $500,000
  • No collateral required for loans up to $25,000
Export Working Capital
  • Borrow up to $5 million
  • Terms of 12 months or less
CAPLines
  • Lines of credit designed specifically for working capital
  • Multiple types, each with a different purpose
  • Terms of 5 to 10 years
Community Advantage
  • Borrow up to $350,000
  • Loans geared toward businesses in underserved markets

Bottom line

Working capital loans give business owners quick access to cash that they can use for day-to-day expenses. If you’re facing a cash crunch, consider your options and apply for the right loan based on your situation. Before applying, compare the rates and fees different lenders offer to get the best deal.

Frequently asked questions

  • Working capital loans are short-term fast loans that give companies funds that they can use to pay for their daily operating expenses.
  • Businesses should apply for a working capital loan if they’re facing a cash crunch and may not have the money that they need to pay their bills on-hand. They may also be good for time-sensitive opportunities or replenishing inventory.
  • Yes, it’s possible to get a working capital loan with bad credit. But the most accessible types of business loans, including invoice financing and merchant cash advances, will have higher interest rates and fees. Be ready to offer collateral or sign a personal guarantee when you apply.