A working capital loan is a catch-all term for short-term small business financing. With its flexible nature, working capital funding is an ideal fit for unexpected business expenses or extra cash to expand and grow your business.The repayment plan and timeline will vary depending on your loan type. Some lenders may require daily or weekly payments from your credit card sales or direct payments from your business checking account.
Types of working capital loans
Working capital loans for small businesses can cover operating expenses like payroll, daily costs, inventory and more. Here are the most common types of business financing to consider for your working capital needs.
Short-term business loans: Term loans provide a lump sum of cash upfront for working capital purposes. Maximum amounts typically range from $250,000 to $1.5 million or higher, with repayment terms typically lasting three to 24 months.
Business lines of credit: If you need frequent cash infusions, a working capital line of credit lets you borrow as little or as much as you need, up to your credit limit. You only pay interest on the amount you withdraw.
Merchant cash advances: Though technically not a loan, a merchant cash advance (MCA) is an alternative form of business financing that offers a lump sum in exchange for a percentage of your business’s future earnings (commonly, your credit card sales). You can repay with a portion of daily or weekly credit card sales. However, the factor rate can make this a more expensive option.
SBA loans: The Small Business Administration offers working capital loans through its CAPLines program — an umbrella term for a type of 7(a) loan that functions as a line of credit. They can offer good terms and loan amounts to help you fund your various business needs.
Pros and cons of working capital loans
| Pros | Cons |
|---|---|
| Flexible funding for a wide range of business purposes Quick funding from some online lenders Accessible to a wide range of businesses with varied minimum requirements | Interest rates can be high due to factor rates Some lenders require daily or weekly payments Collateral may be required |
How to get a working capital loan
The process for applying for working capital financing varies by loan type and lender. However, here are the steps you will likely need to take to get a small business loan:
1. Decide how much you need. Write a list of your company’s most urgent needs and estimated operating costs. Consider whether you need the funds upfront or prefer ongoing access to cash on an as-needed basis. Use our business loan calculator to estimate your borrowing power, making sure the weekly or monthly payments are within your budget.
2. Determine your eligibility. Lenders will typically list their business loan requirements on their website. Factors that determine your creditworthiness usually include your credit profile (your personal FICO Score and business credit score), time in business and annual revenue. Some working capital loans also require a personal guarantee or collateral, such as with secured business loans.
3. Compare small business lenders. You can apply for a working capital loan with a traditional bank, credit union or an online business lender. Compare interest rates, repayment terms and additional fees to find the best loan option for your business needs.
4. Gather required documents. Having essential documents ready can help speed up the application process. You will likely need a business plan, personal and business bank statements, personal and business tax returns and any applicable business licenses.
5. Submit your application. The application process is typically quick and automated, often done online. Your lender may reach out to you for additional information and next steps.
How to compare working capital loans
If you receive multiple working capital loan offers, consider the following factors when picking the loan that best fits your needs:
Interest rate: Working capital loan rates can vary depending on the loan type and lender. Factor rates are also frequently involved, which can make your interest payments higher.
Additional fees: Some working capital lenders add origination and late fees, as well as prepayment penalties. These additional fees can significantly increase the loan’s overall cost.
Repayment term: Your repayments may start immediately and have very short terms. To reduce the risk of default, make sure you can afford to repay the debt by the scheduled date(s).
Loan amounts: While you want the approved amount to cover your necessary expenses, it’s important to avoid borrowing more than you need, as that can be unnecessarily expensive.
Time to fund: How soon you need funds can determine which working capital business loan is best for you. For urgent needs, consider fast working capital loans or same-day business loans. If you can wait, you’ll likely get better rates and terms with an SBA or traditional bank loan.
Lender support: Some lenders offer free business support and coaching as part of the loan process.
Our in-depth catalog of small business lender reviews is a great way to compare business loan options before signing on the dotted line.
Alternatives to working capital loans
While working capital loans can be a great way to cover a range of everyday business expenses, they might not be the best fit for every company. Here are some other ways to get the capital you need to keep your business afloat.
Business credit cards
Business credit cards can cover low-cost expenses while helping you rack up some generous rewards. Qualifications are usually more lenient than traditional small business financing, but watch out — credit card interest rates can go quite high. Because of this, it’s best to use business cards sparingly, making sure to pay off the balance each month.
Business grants
Typically offered by the federal, state and local governments, small business grants can help you access free money for your company. Some private corporations also offer grants or business sponsorships. While these opportunities can be competitive, it can still be worth the time and effort to apply.
Crowdsourcing
Crowdfunding platforms, like GoFundMe for business, can help you raise donations via friends, family and the general public. It’s free to launch a campaign, although the crowdfunding platform typically takes a small cut for their service. Businesses with a strong online presence that can provide a discounted product or service tend to have better success rates with crowdfunding campaigns.
How we chose the best working capital loans
We reviewed more than 15 lenders to determine the overall best seven working capital loans. To make our list, lenders must meet the following criteria:
- Minimum time in business: Options available for businesses that have been operating for six to 24 months.
- Minimum credit score: Personal credit score requirements of 680 or below.
- Loan amounts: Funding amounts ranging from $5,000 to $5 million, with minimal restrictions on loan uses or purposes.
- Rates and terms: We prioritize lenders with competitive fixed rates, fewer fees and flexible repayment terms of at least three months.
- Repayment experience: We consider each lender’s overall reputation and business practices when making our list. We also favor lenders that report to all major credit bureaus, offer reliable customer service and provide unique perks to customers, like free business coaching, early payoff discounts and loyalty rewards.