A Guide to Working Capital Loans for Your Business

ByNaftali FeigJan. 26, 2020

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Watch your business grow with more working capital
Working capital is what enables businesses to effectively manage business cash flow, even during times of financial instability. If you're looking forward to growth in the coming year, here's what you may want to know about working capital loans.

The Top Lenders at a Glance


Minimum Credit ScoreTime Until FundingVisit Site
Kabbage
NoneQualify in 10 minutesView Rates
Lendio
580As little as 24 hoursView Rates
LendingTree
None1 day to 8+ weeks depending on lenderView Rates
LoanBuilder
550As fast as 1 business dayView Rates
Reliant Funding
None3 to 5 business daysView Rates

What is a Working Capital Loan?

The term ‘working capital loan’ refers to any type of financing that helps a company cover everyday expenses. These loans can be used for short-term operational costs like rent, payroll, and accounts payable. They aren’t used for long-term investments or purchases

One of the reasons why working capital is so important is that it can be used in so many different ways that are critical to the survival of the business. It represents an essential source of capital particularly during times when business revenue isn't fully covering business expenses. For example, working capital can be used for any of the following expenses:

  • Purchasing inventory
  • Hiring new employees
  • Paying taxes

How to Choose a Working Capital Loan

When searching for a working capital loan, always compare lenders by rates, repayment terms, loan amounts, and reputation. But most importantly, check that lenders offer the right type of working capital for you. 

Generally speaking, any type of financing designed to cover a business’ daily expenses could be termed a working capital loan. 

The Main Types of Working Capital Loans

Business line of credit

Business line of credit is a flexible type of funding where the lender agrees to supply credit to a business. The business may withdraw funds at any time, up to the credit limit set by the lender. The business repays only what they withdraw, plus interest. As the business repays the principal, the amount is added back to their credit balance.

Invoice factoring

An advance on a business’ accounts receivable that allows the business to obtain funds without taking on debt. Let’s say the business has invoices for $20,000 due in 90 days. Rather than wait for 90 days, the business sells its invoices to the lender for a fee. 

Merchant cash advance

An advance on a business’ future sales that allows the business to obtain funds without taking on debt. The two parties agree on a percentage of daily, weekly, or monthly sales to be automatically deducted from the business’ bank account. 

Unsecured short-term business loan

Some lenders offer a version of a short-term business loan that is actually called a working capital loan. These loans have repayment terms of 6-18 months. Some lenders calculate repayments by factor rate rather than interest rate—making this similar to invoice factoring or a merchant cash advance. Repayments are automatically deducted from the business’ bank account every day or week. Unlike a regular business loan, no collateral is required (and, therefore, the application process is simpler). 

What are the Requirements for Working Capital Loans?

Some types of working capital financing are easier to get approved for than others. All types require the business to have been in operation for a minimum period of time and to generate a certain amount of monthly revenues. 

When you apply for working capital, you can expect to be asked for the following:

  • Information about yourself (and any partners with a 20% share or more in the business)

  • Information about your business, such as what it does and how long it’s been in operation

  • Social Security number, so that the lender can run a credit check

  • Estimated monthly business revenue (or, in some cases, proof of revenue)

  • Recent bank statements

  • Details about your invoices

Why Use a Working Capital Loan? 

According to a US bank study, poor cashflow management is a factor in 82% of small business failures. Invest too much cash in growing the company and you leave too little for everyday expenses. Keep too much cash in the bank and you prevent yourself from growing. Working capital loans solve this problem by providing financing for operational expenses, letting you dig into your cash reserves to invest in and expand your business.

The 5 Best Lenders

1. Kabbage

Kabbage

Kabbage provides credit lines to businesses for covering any expense. Approval gives instant access to funds, and you can draw on the approved amount when you need cash for your business. The terms and fee are easy to understand, and there are no hidden fees. Loans are structured in as credit lines so you can withdraw money as-needed, and the Kabbage card affords you instant access when you need it.

Read the full Kabbage review

Kabbage Kabbage View Rates

2. Lendio

Lendio

Lendio is an online small business loan aggregator that brings business owners and lenders together on one platform. The site is free to use, and offers at over ten distinct loan programs, for every business need, from business acquisition to funding for commercial real estate, increasing your changes to find both a lender and a specific loan program that suits your needs.

Read the full Lendio review

Lendio Lendio View Rates

3. LendingTree

LendingTree

LendingTree was created to help borrowers identify the financing solution they require more efficiently. The company facilitates an instant comparison of several providers to find the best option and offers a wide range of credit and financing solutions. Though LendingTree is not directly a lender, customers are able to narrow down the available choices and select the right loan to match their needs.

Read the full LendingTree review

View Rates

4. LoanBuilder

LoanBuilder

By providing access to highly customizable short-term business loans, LoanBuilder, A PayPal Service, offers borrowers the freedom to design loans according to their needs and specific circumstances. It may be an excellent choice for businesses needing access to short-term cash injections and the flexibility to choose unique repayment solutions with weekly payments.

Read the full LoanBuilder review

View Rates

5. Reliant Funding

Reliant Funding

Reliant Funding is a smart choice for small businesses looking for a short-term loan, merchant cash advances or equipment financing solutions. The quick and simple application process helps businesses needing to balance cash flows or exploit a growth catalyst receive approval in just a few hours.

Read the full Reliant Funding review

View Rates

Summary

Working capital will allow your business to continue to grow no matter what happens. One way to ensure a healthy and strong working capital is by reading reviews and collaborating with a suitable lender that has the strength and financial immunity to offer ongoing cash flow to fit your needs.