What is Working Capital Loans?

What Are Working Capital Loans and How Can They Benefit Your Business?

Working capital loans, also known as short-term business loans, provide quick cash to cover day-to-day expenses like inventory, payroll, and operating costs. For small businesses, these loans can be a lifeline that helps you avoid cash flow problems and keeps your company running smoothly.

How Do They Work?

Working capital loans typically have terms of 1-5 years and allow you to borrow a lump sum of cash upfront that you pay back over time with interest. The amount you can borrow depends on your business’s financials and credit, but usually ranges from $10,000 to $500,000.

  • You repay the loan in installments of principal plus interest, often with fixed monthly payments
  • Interest rates for working capital loans are often higher than long-term business loans but lower than credit cards. Rates typically range from 7-30% annually depending on your credit and the lender.
  • The loan is secured by business assets like accounts receivable, inventory, or equipment. The lender can seize these assets if you default on the loan.

READ ALSO: How to Get a Quick Loan Online Using Financial Instruments: A Practical Guide

Benefits for Your Business

  • Quick access to cash when you need it most. Funds are deposited directly into your business bank account within days or weeks.
  • Flexible terms. Repayment schedules can be tailored to your cash flow, with options for interest-only periods, seasonal payments, and more.
  • Build business credit. Making on-time payments establishes a good payment history and improves your business credit score.
  • Potential tax benefits. The interest paid on the loan may be tax deductible as a business expense, reducing your tax burden.

Qualifying for a Working Capital Loan: Requirements and Application Process

To qualify for a working capital loan, you’ll need to meet certain requirements and go through an application process.


1. Documentation

You’ll need to provide documentation to verify your business’ financial standing and cash flow needs. This typically includes:

  • Business tax returns for the last two years
  • Personal tax returns (if your business is less than two years old)
  • Business bank statements for the last six months
  • Projections for how the loan will be used to generate revenue and profits

2. Credit score

Your personal and business credit scores are very important in qualifying for a working capital loan. Aim for scores above 650, as higher scores mean lower interest rates and more favorable loan terms. Check your scores in advance and look for any errors to dispute. If needed, work to improve your scores before applying.


3. Collateral

For working capital loans, lenders often require collateral like business equipment, accounts receivable, inventory, or other assets. The collateral helps reduce the lender’s risk, so the more valuable collateral you can provide, the better your chances of approval and lower interest rates.

4. Interest rates

Interest rates for working capital loans are usually variable, ranging from 7-30% depending on your qualifications. Rates are higher for riskier borrowers, so work to present yourself as a low-risk, high-reward customer. Consider providing collateral or a personal guarantee to get a lower rate.


The application process typically takes 2 to 4 weeks. Be prepared for an underwriter to review your documents, run a credit check, and possibly meet with you in person.



Comparing Working Capital Loan Options: Banks, Online Lenders, SBA Loans

The three most common sources for working capital financing are traditional bank loans, online business loans, and SBA loans.

1. Banks

Banks typically offer the lowest interest rates for working capital loans since they can leverage your business’s existing accounts and relationships. However, their application process is often lengthy, requiring tax returns, financial statements, business plans, and collateral like business assets. Banks usually prefer lending to businesses with a multi-year operating history and strong credit.


2. Online Lenders

Online lenders like Kabbage, OnDeck, and BlueVine can approve applications quickly and fund loans fast, usually within a few days. However, their rates are often higher than banks. On the plus side, their qualification criteria may be easier to meet for some small businesses. Many don’t require collateral but may have shorter repayment terms.

3. SBA Loans

SBA working capital loans, like the SBA Express Loan, offer competitive rates and longer repayment terms of up to 7 years for working capital. However, the application process can take weeks or months and requires extensive paperwork. SBA loans are very secure since the SBA guarantees a portion of the loan. Strong personal and business credit are typically required.



Evaluate how quickly you need funding versus getting the lowest rate. Consider your business’s qualifications and how much paperwork you can handle. Banks may be ideal if you want the best rates and terms, have time for their process, and meet their lending criteria. Online lenders and SBA loans can also be good options if speed and ease of qualification are priorities, as long as you can accept their potential downsides like higher rates or longer wait times. The right choice for your small business depends on balancing these kinds of factors.

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