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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. If you run into a cash shortfall or have slow-paying customers, a working capital loan could be the answer if you need to borrow money to cover these costs. But make sure you understand how a working capital loan works and choose the right type of working capital loan to fit your business.
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. Consider all your loan options to choose the best loan for your business, such as term loans or 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. 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 to avoid a cash crunch.
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. |
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| SBA loans | Government-backed loans with large limits designed for businesses that can’t qualify for conventional loans |
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| Business lines of credit | Draw funds multiple times as needed and only pay interest on your balance. |
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| Business credit cards | Use for everyday purchases up to the credit limit and only pay interest on the amount borrowed. |
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| Invoice financing/factoring | Loans secured by the value of your invoices. Get a percentage of the amount you’re owed without waiting for payment. |
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| Merchant cash advances | Offers you an advance on future sales and automatically repaid through a percentage of your daily or weekly sales |
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Where to get a working capital loan
Many different lenders offer working capital loans, including banks, credit unions and online lenders. 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. They also tend to have strict criteria to be eligible for a business loan, such as having a personal credit score of 670 or higher.
Here are three of the top working capital lenders on the market.
| Lender | Working capital loans | Top features |
|---|---|---|
| Bank of America |
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| Wells Fargo |
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| PNC Bank |
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Online lenders
Online lenders are typically nonbank companies that operate solely on the internet. They offer various types of loans and financing including alternative financing like invoice factoring and merchant cash advances. You apply for and complete the business loan application online, streamlining the process without having to go in person to a bank.
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. But that speed and flexibility come at a cost, with the lender requiring high rates and fees unless you have strong credit.
Consider the following five lenders if you’re looking for an online working capital loan.
| Lender | Working capital loans | Top features |
|---|---|---|
| OnDeck |
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| National Funding |
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| SMB Compass |
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| Accion Opportunity Fund |
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| Triton Capital |
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SBA loans
SBA loans are loans guaranteed by the U.S. Small Business Administration and offered through approved SBA lenders. These loans offer large loan amounts and capped interest rates and are designed to help business owners that can’t qualify for traditional financing.
However, SBA loans involve a lot of paperwork and require SBA approval. Because the approval process is more involved, funding can take 30 to 90 days to get approved and reach your bank account.
If you’re considering an SBA loan for working capital, you have a few loan types to choose from.
| Type of SBA Loan | Features |
|---|---|
| SBA 7(a) loans |
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| SBA Express |
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| Export Working Capital |
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| CAPLines |
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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.
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The amount of working capital funding you need depends on your company’s liquidity and financial health. To do that, divide your current assets by your current liabilities. Ratios greater than 1 indicate that you have enough money to pay the bills, but some industries may require a ratio of 2 to ensure all expenses can be paid. Borrowing enough to keep your company in the black can help you maintain financial health. But make sure that you can manage repayments before signing on the loan.
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Working capital loans have credit and revenue requirements that may make them prohibitive for new businesses or companies with limited annual revenue. If your business has a credit score under 600 or less than a year in business, you may have to look with online lenders to get approved. You will also face higher interest rates and fees than a borrower with strong credit.
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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.
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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.
Frequently asked questions
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