What Are Working Capital Loans and How Do You Get One?

What Are Working Capital Loans and How Do You Get One?

What Are Working Capital Loans and How Do You Get One?

Working capital is the money a business uses to cover its daily expenses like utilities, supplies, payroll, and rent. A working capital loan offers your business a way to temporarily pay for these expenses when your bank account is running low. 

You might think that if your business is successful and you manage its finances correctly you could never have need of a working capital loan. But that’s not necessarily true. While it’s important to keep some money in reserve, you don’t want your company’s financial safety net to grow too large either. Do so and you could miss some valuable opportunities to invest in your business and potentially grow. 

But what happens when an investment goes wrong or you don’t collect certain money as anticipated? What if your company’s sales cycle is seasonal and you have an unexpected expense come up during a slow income month? When funds are tight and cash flow is low, a working capital loan may help your business to cover those everyday operational expenses until your business has a chance to catch back up through sales, invoices, investments, or other means. 

What Are Working Capital Loans? 

As mentioned, a working capital loan is a type of business loan that can help when your company finds itself in a tight financial spot for whatever reason. This form of business funding isn’t used for long-term investments, but rather is reserved for short-term financial goals. 

Before we review the different types of working capital financing options available, let’s back up and review working capital itself — how it’s defined and how it’s calculated. 

Working Capital

Working capital is the difference between your business’ current assets and its current liabilities. Assets may include accounts receivable, inventory, and cash on hand. Liabilities may include accounts payable and any payments due on business debts in the next 12 months. 

The Security Exchange Commission describes it this way. “Working capital is the money leftover if a company paid its current liabilities (that is, its debts due within one-year of the date of the balance sheet) from its current assets.” 

Here’s the formula you need to follow to calculate your business’ working capital: 

  • Current Assets – Current Liabilities = Working Capital 

To calculate your business’ working capital ratio, the formula is slightly different:

  • Current Assets ÷ Current Liabilities = Working Capital Ratio

So, if you have assets worth $400,000 and liabilities totaling $200,000, the working capital ratio of your business is 2:1. According to QuickBooks, an accounting software developer, your business should aim to have a working capital ratio of 2:1. 

Working Capital Loans

Cash flow issues can be incredibly stressful and very discouraging for any small business owner. Nav’s American Dream Gap Report revealed that 20% of small businesses considered closing their doors within the last year. Why? For nearly a quarter of those businesses it was due to cash flow issues.  

Working capital loans can offer an immediate influx of cash to help your company cover expenses during an emergency or downturn in business. These short-term loans won’t keep you afloat forever, of course, but they can help to stop the bleeding until you’re able to find a more permanent solution to solve your business’ cash flow problems. 

Types of Working Capital Loans 

Below are five types of working capital financing options, along with some of the working capital lenders and other companies who offer them.

Working Capital Short-Term Loans

Because working capital is generally used for your business’ daily expenses, loans designed to help cover these costs will typically have shorter payback terms. Often these short-term loans, sometimes called cash flow loans, have to be repaid to the lender within one year or less. 

They’re generally not meant to cover long-term investments like real estate or pricey equipment purchases. Still, it is possible that some business owners occasionally may use a short-term business loan for these purposes. 

Ready to review your options? Here’s a list of online lenders that currently offer short-term business financing. 

Always review the costs, terms, and conditions of any financial product carefully before you fill out an application. You can also sign up for a free Nav account and get matched with the offers you’re most likely to qualify for based on your credit and other factors. 

Working Capital Lines of Credit

Want the flexibility to be able to borrow only as much money as you need, pay it back as you can, and then borrow from that same source again in the future without the need to fill out a new application? If this type of borrowing freedom appeals to you, you may want to look into opening a line of credit for your business. 

A working capital line of credit, also called a small business line of credit, can give companies access to a constant supply of funds. Even businesses that aren’t experiencing any cash flow problems at all may benefit from having a line of credit in reserve.  

If a working capital line of credit interests you, here are several online lenders you may want to check out for yourself: 

Just remember, before you sign up for any type of business financing, lines of credit included, be sure to read the fine print. Working capital lines of credit may come with high interest rates, lower loan amounts, or aggressive payback terms. It all depends upon your credit, the lender, and other business factors. 

Merchant Cash Advances

A merchant cash advance isn’t a loan in the traditional sense of the word. It is, however, a way for many businesses to access the working capital they need to make ends meet temporarily.

To be eligible for a merchant cash advance, your business will need to accept credit card payments. Why? The cash advance provider will take a portion of your credit card sales, typically each day until the advance plus interest and fees has been repaid in full. 

On the plus side, you can usually get access to funds through a merchant cash advance quickly. But that quick access to cash comes at a steep cost. In fact, the APR on merchant cash advances can climb as high as 70% to 200%. Additionally, both your business credit and your personal credit is likely to be reviewed as part of your application for funding. 

If you’re stuck between a rock and a hard place and cash right away, here are a few merchant cash advance providers you can consider: 

Invoice Financing

Another form of short-term financing that businesses regularly use to solve cash flow problems is invoice financing. This type of financing may be especially suited to businesses that invoice for their services or goods after they have been provided to customers. 

Because these types of businesses often have to wait on customers to pay, cash flow can be a bit tricky to manage. Invoice financing can help businesses stay afloat in tight financial times if needed. 

Some companies that provide invoice financing include: 

SBA Loans

If you have good credit — both business and personal — you might be able to qualify for a low-rate SBA loan to help you with your working capital needs. Because the loans are guaranteed by the Small Business Administration, they tend to pose less risk to lenders. This makes SBA loans one of the most affordable ways to secure business financing. 

However, there are two big catches when it comes to SBA loans. First, you’ll need to qualify for the loan, and the process of doing so isn’t exactly easy. In addition to strict business and personal credit score requirements, you’ll need to satisfy a host of other lender criteria as well. Additionally, if you need access to funding in a hurry, an SBA loan might not be the right choice. The tedious application process on these loans often takes 60-90 days. 

But, if you’re not in a huge rush and you believe you may be able to satisfy SBA loan requirements, there’s no doubt that an SBA loan is a great financial product. You can seek out SBA loans from any of the following: 

  • Traditional Financial Institutions Like Banks and Credit Unions
  • SmartBiz

Interested in learning what it takes to actually qualify for an SBA loan? This step-by-step guide may help. 

Working Capital Loans for Startups

Startup companies in particular can be vulnerable to cash flow problems, in large part because it often takes a new business some time to start generating sufficient cash flow to cover expenses. Working capital loans can be a great tool to help startups navigate this challenging time. 

However, your funding choices as a startup (and most likely a credit unknown) can often be limited. Thankfully, limited doesn’t mean nonexistent. Here are a few financing sources you might be able to qualify for to help your new business’ cash flow during its beginning stages: 

Apply for Working Capital Loan

Once you’re ready to officially apply for a working capital loan, it’s wise to first take a look at the condition of your credit reports. As a small business owner, this means you need to check both your business and personal credit reports. Depending upon the financing provider, both could matter. 

You can check your business and personal credit free with Nav

Understanding your credit is an important (and often overlooked) part of setting your business up for success. According to the American Dream Gap Report by Nav, small business owners who actually understand their business credit scores are 41% more likely to receive an approval when they apply for business financing. 

Working Capital Loan Interest Rate

The next step you should complete before you apply for a working capital loan — or any other type of financing — is to understand how much a company is going to charge you to borrow money. In most cases, your credit will likely matter in the pricing of your loan. The final interest rates you are offered on a working capital loan can vary based on a variety of other factors too, from time in business, to your credit scores, to what the lender is willing to offer. 


The interest rate on a loan often isn’t the only cost associated with a loan. Fees are important to consider as well. 

Charges like the origination fee and any fees charged during the application process itself should be considered when you calculate the cost of financing. Tools like Nav’s business loan calculators can help make the process of figuring out how much a loan or cash advance will actually cost you a lot easier.  

Is a Working Capital Loan Right for Your Business? 

In the end, only you can determine whether a working capital loan or other financing solution is the right move for your company. But there are several important questions you should ask yourself as you’re weighing the pros and cons. 

1. Are You Likely to Qualify? 

With many types of financing, both your business and personal credit may play a role in your ability to qualify. Checking your credit and researching a lender’s requirements may help you to figure out which types of financing you’re likely to qualify for before you apply. MatchFactor by Nav can also show you your approval odds for dozens of business financing options. 

2. Can You Afford the Payment? 

Your business’ ability to keep up with the repayment terms of a loan (daily, weekly, or monthly) is another critical piece of information you need to consider when you’re deciding whether or not to take out a working capital loan. If your business takes out a loan that it ultimately can’t afford, you could potentially damage your business and personal credit severely. You and your business could also face negative repercussions for many years such as potential liens, bank levies, and even the loss of personal assets if you’ve put up a personal guarantee for the loan. 

3. Will Your Vendors Give You Terms? 

One often overlooked source of short-term business financing is vendor credit. If you have a good relationship with your vendors, it might be willing to offer you net-30, net-60, or even net-90 day terms on the goods and services your company needs. These extended payment terms could help immensely with short-term cash flow problems and might even eliminate your need for a short-term loan elsewhere. All you have to do is ask to see if your vendors are willing to extend terms — and maybe see if your vendor’s competitor is willing to offer terms if your vendor denies the request. 

There’s no question that cash flow problems can be crippling to a business’ success. If your business is barely staying surviving month after month, it might be time to try to figure out how to make some big changes in either your company’s expenses, income, or both. However, if you simply need a one-time, immediate influx of cash to make it through a rough patch, a working capital loan could be just what the doctor ordered. 

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This article was originally written on June 26, 2019 and updated on February 13, 2020.

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Michelle Black

Michelle Black

Michelle Lambright Black, Founder of CreditWriter.com and HerCreditMatters.com, is a leading credit expert with over a decade and a half of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting, and debt eradication. Michelle is also an experienced personal finance and travel writer. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).

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