What is a working capital loan?
A working capital loan is a type of short-term financing used to cover current business expenses, such as rent, payroll, utilities, or inventory purchases. Working capital loans are designed to help businesses stabilize cash flow and manage operating costs, but are not suitable for long-term expenses.
Business working capital loans can take many forms, including term loans, lines of credit, SBA loans, and invoice factoring.
How to get a working capital loan
Working capital loans are available from a variety of sources including online lenders, banks, and credit unions. Banks and credit unions are options for established businesses with collateral and strong credit, while online lenders can provide options for borrowers with irregular credit histories.
Online or alternative lenders will generally charge higher APRs than banks and credit unions.
When is a working capital loan a good idea?
Funding working capital can be a smart move when your business needs cash to cover day-to-day operating expenses. Loans can be a lifeline for seasonal businesses experiencing declining sales, such as landscapers, ski resorts and retailers.
This is a short term loan to resolve a temporary downturn, so it is not the best solution for expanding a business or financing a long term investment. If you must borrow for these reasons, consider a long-term business loan instead.
Types of working capital loans
Term loans: While term loans are commonly used to finance expansion, they can also be used for short-term working capital. Term loans provide a sum of money up front that is repaid over a set period of time with fixed and equal payments.
Business lines of credit: A line of credit offers more flexibility than term loans because you have access to funds up to a credit limit and only pay interest on what you’ve borrowed. You can withdraw and refund funds as often as you like, as long as you make payments and don’t go over your limit.
SBA loans: These loans are guaranteed by the US Small Business Administration and issued by participating banks, credit unions, and online lenders. SBA loans provide up to $ 5 million for working capital, expansion, or equipment purchase.
Invoice factoring: If you have customers with unpaid invoices, this type of financing allows you to turn invoices into working capital fast. The factoring company buys your invoices for an upfront payment (less fees), and it gets paid when it’s collected from your customer.
Compare small business loans
When looking for a business working capital loan, it’s important to compare all of your choices based on the APR, which represents the actual cost of the loan, including all fees.
For more options, check out the NerdWallet list of small business loans that are best suited for business owners. Our recommendations are based on factors such as market size, customer experience, and lender reliability.