Working capital loans

What is a working capital loan?

A working capital loan is financing a business can use to cover everyday operating expenses and short-term gaps between cash going out and cash coming in. It’s usually repaid within a few months to a few years, as opposed to financing for equipment, real estate or acquisitions. 

Working capital itself is the money a business has left over after it pays debts due within a year. 

Business owners often look for working capital financing. In the Federal Reserve Bank 2026 Small Business Credit Survey (SBCS) of employer firms, 56% of applicants who sought financing in the previous 12 months said they wanted financing to meet operating expenses, the top reason given. The survey counts payroll, rent, and inventory costs as operating expenses. 

How do working capital loans work?

Cash gaps are common. In the SBDC employer survey, 54% of firms said paying operating expenses was a financial challenge in the prior 12 months, and 50% pointed to uneven cash flow. 

Working capital lenders tend to care more about your recent cash flow than your collateral. Online lenders, for example, typically use technology to analyze a business’s cash flow and other data when they underwrite and price loans. Repayment can be daily, weekly, or monthly over a short term, depending on the product. The loan is sized to your cash gap, not a purchase or project. Many of these cash flow gaps are relatively small: 37% of SBCS employer applicants sought less than $50,000.

What are the risks? Frequent payments can strain cash flow, because some products collect daily or weekly. Costs can run higher than you expect, too. But a loan can’t fix a business that is not strong enough to withstand cash flow fluctuations. If you’re losing money, and not just waiting on cash, borrowing can make things worse. 

Types of working capital loans compared

Here are the main options for working capital loans and how they stack up. 

To learn about business financing through PayPal, read Nav’s PayPal Working Capital review. 

Working capital loan interest rates and costs

There’s a wide range of interest rates and costs when it comes to working capital financing. On the lower end you’ll find loans from traditional lenders like banks and credit unions, SBA loans, and microlenders. On the higher end you’ll find some alternative lenders including some online lenders.

Among employer firms that participated in the SBCS survey, 60% of those who borrowed from online lenders said their costs were higher than expected, compared with 37% at small banks and 32% at large banks. 

Typical APR ranges by type

The cost of working capital financing varies by lender, type of financing, and borrower qualifications. Here are some key metrics to keep in mind. 

SBA loans

SBA loan rates are capped by the SBA. Maximum rates are tied to indexes, including the prime rate. 

See current SBA maximum loan rates. 

Merchant cash advances

Some short-term alternative financing products, such as merchant cash advances or business cash advances, state a factor rate rather than an interest rate. The Federal Reserve notes that a factor rate isn’t comparable to an APR. In one Fed analysis, a lender advertising a 1.15 factor rate had an estimated APR of about 70%. 

Here’s an example of translating a factor rate to an effective APR using Nav’s business loan calculators:

Let’s say you get an advance of $20,000 at a factor rate of 1.3. That means you’ll need to pay back $26,000 plus any fees charged. (Multiply the amount of the advance by the factor rate to get that total payback amount. In this case 20,000 x 1.3 = 26,000.)

Then, let’s say the financing company will hold back 15% of future sales of $20,000 a month to pay back the advance.

In this example it takes almost 9 months to pay back the advance and the effective APR works out to be almost 77%.

Notably, if you pay it back faster — 20% of monthly sales of $20,000 instead of 15% — the effective APR will be higher because APR measures the cost over time. 

Fees and repayment terms

Interest may not be the only cost. There may be origination fees (a fixed amount charged up front), draw fees when you take more money from a line of credit, or prepayment fees if you pay back earlier. Compare the total cost, not just the advertised rate.

The repayment schedule matters, too. Some products require daily or weekly payments, rather than monthly payments. This can affect costs as well as cash flow. Make sure your revenue can support the payments.

Who qualifies for a working capital loan?

Lenders often consider your business revenue, industry, time in business, and credit, though requirements vary from lender to lender.

Working capital loans typically don’t require collateral, but a personal guarantee may be required. Among SBCS employers with debt, 59% used a personal guarantee, though that figure didn’t apply only to working capital loans. 

Revenue

It’s not uncommon for lenders to require at least $10,000 in average monthly revenue or more. In the SBCS survey, employer firms with revenue of $100,000 or less were fully approved 37% of the time versus 48% of businesses with $100,000 to $1 million in revenue. Microloans and SBA 7(a) loans are two examples of loans that may be available to businesses with lower revenue. A solid business plan with projections showing the business will repay the debt from cash flow is required.

Time in business

Established businesses often have a better shot at approval. In the SBCS survey, firms in business 21 years or longer were approved 63% of the time, while the approval rate dropped to 51% for businesses six to 20 years old, and 48% for businesses zero to five years old. 

The SBA Working Capital Loan program generally requires at least twelve months in operation, though a lender may make an exception for a business with experienced management. SBA 7(a) loans and microloans may be available to pre-revenue startups if projections and other qualifications support the loan. 

Credit

Lenders may check personal credit and/or business credit. Some SBA loans previously required lenders to check a FICO® Small Business Scoring Service℠ (SBSS) score but that is now optional, along with any other credit scores the lender may review. Banks and traditional lenders often prefer good personal credit scores of at least 680 to 720 or more. 

How to apply for a working capital loan

Here are the basic steps:

1. Check your business and personal credit. Depending on your lender’s policies, one or both may be important so it’s helpful to make sure they are accurate.
2. Calculate how much money you need. It can be risky to apply for too little because your business may run out of cash before the debt is paid back. 
3. Match the type of financing to your needs. Recurring cash flow issues due to customers that pay slowly may be better served with a line of credit, for example.
4. Prepare financial documents. You may need business bank statements and/or financial statements. Be sure your bookkeeping is up to date. 
5. Compare offers. Look at annual percentage rates (APR), fees, and the repayment schedule. Understand personal guarantees and collateral requirements. 

Working capital loans for startups

Most working capital lenders want to see a history of revenue, which makes it harder for a new business to qualify. Here are options that may be available to newer businesses:

• Business credit cards: Available to new entrepreneurs who meet issuer requirements such as good personal credit scores and sufficient household income, business credit cards with 0% intro APRs may provide low-cost funding for several months. 
• SBA microloans: This program offers loans up to $50,000 and funds may be used for working capital. 26.7% of these loans went to startups, according to the SBA.
• Community lenders: Non-profit community financial development institutions (CDFIs) offer financing to small businesses that may have trouble qualifying for traditional financing.
• Vendor terms: Suppliers may allow you to buy now and pay later. Net-30 terms, for example, give you thirty days to pay. 

For more ideas, read Nav’s guide to startup business loans with no money. 

Best working capital loan options

Here are some working capital loan and other financing options available through Nav partners:

When does a working capital loan make sense?

Working capital loans can make sense when your business needs money for a shorter period of time, you can pay it back from future cash flow, and the cost won’t destroy profit margins. Ask yourself these questions:

1. Is timing the problem, or is the business losing money? Financing can be helpful when customers pay slowly, or there are seasonal fluctuations, for example. But if your business is continuing to lose money, borrowing won’t fix the underlying problem. 
2. Can you afford payments? If you can’t make future payments, you can damage your business credit and face liens, collection accounts, lawsuits, or even risk to your personal assets if you signed a personal guarantee.
3. Will suppliers offer payment terms? While vendor credit isn’t a loan that puts money in your bank account, it can help smooth out cash flow.
4. How does the loan affect margins? Understand the total cost of that loan and what that does to your profitability. 

You may have options other than a loan. Among firms with financial problems, the SBCS found that 54% reported using personal funds, 48% raised prices, 47% used cash reserves, 47% cut costs, and just 36% took on debt. You may consider:

• Pricing: Raising pricing strategically, or discounting for your best customers
• Late fees or collections: If clients pay late, charging a late fee or even turning severely delinquent accounts over for collections may be needed. 
• Expense cuts: Review expenses carefully to see whether you are paying for expenses that aren’t necessary. 
• Vendor terms: Ask your suppliers for more time to pay. Some will extend terms to 60 days, for example. 

The bottom line

Working capital loans and financing can be an essential part of running your business successfully. The best time to evaluate financing options is before you really need it.

Nav Prime lets you check your personal and business credit in one dashboard, and Nav funding readiness can help you prepare for funding.

When you’re ready to compare offers, start with Nav’s business loan marketplace. 

Frequently asked questions