Working Capital Loans

A working capital loan can finance any business expense without limitation, like marketing campaigns, inventory, payroll, etc. Both traditional and online lenders offer business lines of credit as well as the Small Business Association.
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Working Capital Loan Types, Pros and Cons & How to Apply

Time in Business

12 Months+

Annual Revenue


Credit Score


Funding Amounts
$10,000 - $750,000
6% - 39%
6 months - 25 years
Processing Time
3 to 90 days

A working capital loan can be used to fund the everyday operations for a business. These loans give a company additional funds to cover its short-term operational requirements and can be used for any business use case. Working capital loans are not generally meant for long-term purchases or uses however the lender cannot restrict its use.

What is a working capital loan?

What is a working capital loan?

A working capital loan is corporate debt used to fund the everyday operations for a business. These loans give a company working capital to cover its short-term operational requirements and can be used for any business use case. Working capital loans are not generally meant for long-term purchases or investments.

What are working capital loan types?

What are working capital loan types?

There are four working capital loan types. All of these loan types can help businesses fill gaps in their financing, make up for seasonal variability in income and cover payroll expenses. The types are: term loans, lines of credit, SBA loans and invoice factoring.

Business Term Loans

A business term loan is a lump sum of money you borrow from a lender, and pay back at a fixed interval— with interest — over a set period of time. Many businesses choose term loans because they don’t want to dip into their capital reserves but would rather allow a lender to finance their capital use (projects and business capital needs) at a fair price. In most cases you’ll pay off the loan monthly, however other payment terms might be available on a case-by-case basis. For example, some lenders offer daily, weekly and bi-weekly repayment options in addition to monthly options. Repayment periods generally begin at 12 months and last up to 10 years. 

Term loans typically include these features:

  • Repayment time frame: Several months to 30 years
  • Interest rate: 6% - 39% 
  • Factor Rates: 1.19 - 1.35
  • Loan amount: $10,000 and up

Term loans are best to use when your business needs to invest in a longer-term enhancement or business improvement, or simply for a use case that will not diminish in a short period of time. Additionally, when the expected return on investment (ROI) is greater than the cost of the loan, then the term loan can be a great choice. It's less desirable to use a term loan when you are in a temporary cash crunch as this could drag your business down.

Business Lines of Credit

A business line of credit is revolving credit, allowing you to carry a balance that accrues interest. Think of it in the same way as a Credit Card. If you don't use the line of credit, you don't have to make any payments. Once you draw from the credit line, as long as you make the minimum payment each month, you can either pay your balance in full or pay whatever you can afford and keep in mind that your unpaid balance will accrue interest.

Typical features of a business line of credit include:

  • Draw period: Up to five years
  • Credit limit: $5,000-$750,000
  • APR: 10% - 39% 

Business lines of credit offer more flexibility compared to term loans since businesses obtain access to cash up to a credit limit, and only pay interest on the amount they have borrowed. Businesses can draw and repay the financing as often as they wish, provided they stay current on payments and stay at or below the credit limit.

SBA Loans

An SBA loan is guaranteed by the U.S. Small Business Administration. 

These loans are designed to assist small businesses begin, maintain and expand. There are several SBA loan programs created for a variety of purposes and applicants. Each program contains its own loan sizes, terms and rates. 

The primary SBA loans for working capital debt are:

SBA 7(a)


SBA Microloans

  • Most popular SBA business loan 
  • Loan size: Up to $5 million
  • Interest rates: 5.5%-9.75% 
  • Repayment term: Typically 10-25 years
  • Included in the 7(a) loan product 
  • Designed for cyclical, seasonal or short-term needs
  • Has options of a working capital line of credit, a seasonal line of credit, a builders line of credit or the Contract CAPLine loan
  • Loan size: Up to $5 million
  • Repayment term: Up to 10 years
  • Accessible to small businesses requiring financial help to begin or grow
  • Proceeds can be utilized for working capital, purchase of machinery and equipment, inventory and other operational expenses 
  • Loan size: Capped at $50,000 
  • Interest rates: 8%-13%

Invoice Factoring

Invoice factoring allows small businesses to obtain cash fast without needing to be eligible for a traditional loan or dealing with a long application process.

Invoice factoring is a procedure where a business sells its invoices to a third-party factoring company at a cost for a portion of the unpaid balances, typically 85%-95% of the full value. 

For example, if your business provides an invoice to a customer for $5,000 and if the customer has up to 60-days to pay the invoice, your business is stuck waiting to be paid. A factoring company will purchase that invoice from you for a certain amount, for example $4,850. The factoring company will pay you upfront so you don’t need to wait on the payment from your customer.

If a business has clients that haven’t paid their invoices yet, this type of working capital loan lets them convert the invoices quickly into working capital subtracted by any fees. 

The factoring company purchases a portion of the company’s invoices for an upfront payment and then gets reimbursed when the company’s client pays it directly.

How do working capital loans work?

How do working capital loans work?

Working capital loans work to fund everyday financial operations for businesses that do not have consistent cash flow or revenue stream. This loan product is typically utilized to keep the business afloat, while conserving its cash reserves.

All businesses need to have cash reserves to handle planned and unexpected costs in order to stay afloat. Working capital loans provide a lifeline to businesses by giving them access to cash when they need it.

The calculation for working capital is as follows: 

  • Current Assets – Current Liabilities = Working Capital

Assets can include inventory, accounts receivable and cash reserves. Liabilities can include accounts payable and other debt.

As an example, assume a business owns $100,000 in assets and $75,000 in liabilities.

$100,000 in Current Assets - $75,000 in Current Liabilities = $25,000 in current Working Capital.

In this case, if an unforeseen cost of $25,000 or more occurred, then the company would run out of money and likely go out of business. 

Although credit cards can provide a fast way to pay for unexpected expenses, they tend to have expensive interest rates and low limits. Another option is a working capital loan, which can provide immediate cash for businesses to overcome emergencies or downturns in business.

A business can use a working capital loan to pay for things like debt, payroll and rent. If a company has a bad season, a working capital loan can keep it alive during the following months after revenue drops.  

Working capital loans may not require a company to offer up collateral and in many cases can be approved within a few hours and funded the same or next day. They are a flexible option for businesses to consider when they need cash quickly. 

What can a working capital loan be used for (examples)?

What can a working capital loan be used for (examples)?

A working capital loan can be used to pay for short-term business costs tied to day-to-day operations. 


  • Replacement of equipment and tools needed for the business or repairs to these equipment and tools
  • Loan payments
  • Rent or mortgage payments 
  • Payroll 
  • Utilities
  • Inventory and materials needed for customers
Pros and cons of working capital loans?

Pros and cons of working capital loans?

There are a handful of pros and cons for working capital loans:



Easy and quick to obtain with less paperwork than traditional loans

Interest rates can be high to compensate the lender for risk

Allows businesses to cover gaps in financing for everyday operations and ensure they have enough cash to stay afloat

Working capital loans are typically connected to a business owner’s personal credit. Missed payments can hurt their credit score

Offers flexibility. The business can use the capital for payroll, buying equipment, paying off debt and more

Collateral such as real estate or equipment may need to be provided if the company’s credit rating is low

Is a form of debt financing so does not require an equity transaction. This means a business owner can keep full control of their company and their equity will not be diluted

Frequently obtaining this type of loan can look bad to banks for future financing

Those with high credit ratings may be eligible for an unsecured loan, meaning they do not need to put up any collateral 



How much do working capital loans cost?

How much do working capital loans cost?

Working capital loans cost a business in two ways.

First, to obtain a working capital loan the business may be required to pay an origination fee to the lender in addition to interest or other fees. 

Second, a working capital loan will typically have an interest rate ranging from 6% - 39% or factor rates between 1.19 - 1.35. The rate can vary depending on the type of working capital loan, the borrower’s credit rating and other factors.

How do I know if a working capital loan is right for my business?

How do I know if a working capital loan is right for my business?

A working capital loan can be a terrific option for businesses that are small, new, don't have typical collateral or just happen to be in a cash flow slump.

This type of debt may be a good option for businesses that have limited cash reserves and require cash to cover their daily costs. Working capital financing can give businesses a chance to survive, especially seasonal businesses that usually go through a decline in revenue during the off-peak months.

A working capital loan is generally a short-term solution to a short-term problem, and it isn't the best way for a business to fund long-term investments or projects. For businesses that need to borrow for that type of reason, it’s better to evaluate a business term loan as a potential solution.

How to apply for a working capital loan?

How to apply for a working capital loan?

When a company decides it would like to apply for a working capital loan, then it should follow the steps outlined below.

  • Prequalify if possible 
  • Some lenders provide an opportunity to prequalify. This allows potential borrowers to share information about their financial needs, income and other details to learn what loan size, rate and repayment term they may be eligible to obtain. This process usually only necessitates a soft credit inquiry, which means there is no impact on the company’s credit rating.
  • Decide how the business would like to receive its cash
  • Businesses can receive funds through an upfront payment or via an as-needed basis. If the company wants to receive its funds in one lump sum, then it should target a term loan or SBA loan. However, if it would prefer to save money by only paying interest on funds as it needs them, then it should consider moving forward with a business line of credit.
  • Run through the flexibility and repayment term 
  • Lenders can have their own repayment structure. Some financing options require monthly payments while others may require weekly or daily payments. Consider the term when selecting a lender.
  • Look at all the fees
  • There are lenders that offer business loans that don’t contain any fees at all - e.g. no origination fee, late payment fee or prepayment penalty. That said, many lenders do have these types of fees. Businesses should be certain to include the fees when shopping for the best available terms.
  • Run business and personal credit scores
  • If a company has its own credit rating, lenders will evaluate both the business and personal credit scores. A business should check both scores to determine its chances of approval. It is required to have a personal FICO score of at least 550 to be eligible for a working capital loan, but a score over 660 will give a company a much better chance to get superior terms.

With Lendzero, applying for a working capital loan is easy. 

Step 1: Click on the Get Approved button above and answer a few basic questions about your business. We will inform you about your best options and how many exist (this will set your expectations). 

Step 2: After this is complete, you will be asked to create a username and password to begin your electronic loan application. This process normally takes about 6 – 7 minutes (if you have all your documents easily accessible and ready). 

To complete the loan application, here is what you will need to have handy:

  • Business TAX ID (federal tax id number, aka EIN/FEIN)
  • Estimated business revenue and average bank balances
  • Social security number for all applicants
  • Last 3 months of business bank statements (download the PDF statements from your business bank account)
  • Most recent years tax return in PDF format (all pages)

Step 3: Once the application process is complete, we will send you the completed loan application for you to review and sign. Once you have signed for your application, the process is complete. You have officially applied and started your journey to receiving pre-negotiated working capital loan funding offers. Your Lendzero funding specialist will reach out to you to guide you through the remaining steps of the process, and provide the necessary guidance and support needed with the goal of successfully obtaining the proper loan.

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