What Is a Working Capital Loan And How Does It Work?

As a business owner, there are seasons of low revenue or other factors that can temporarily reduce working capital and place your business in financial hardship. About 56 percent of businesses struggle to pay operating expenses, the second most common financial challenge they face, according to the 2025 Report on Employer Firms. 

A working capital loan could be the answer to your working capital shortfall. Understanding what these loans are and how they work will help you ensure a temporary and affordable solution to a temporary problem.

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 like:

• Payroll and wages
• Employee benefits
• Rent or lease payments
• Utilities
• Supplies
• Insurance
• Short-term debts

You may use these loans to cover cash flow gaps, such as during slow seasons or when you need to buy inventory for a large customer order. 

Working capital loans  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 loans 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:

Note that working capital 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:

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 of between 1.2 and 2.

Pros and cons of working capital loans

Pros

• Quick funding. Many working capital loans can be funded within a few days. If you go with a traditional bank lender, funding can take up to a few weeks.

  No specific collateral required. Working capital loans typically don’t need assets backing the loan. This helps you qualify even if you don’t have valuable business assets.

• Quick funding. Many working capital loans can be funded within a few days. If you go with a traditional bank lender, funding can take up to a few weeks.
• No specific collateral required. Working capital loans typically don’t need assets backing the loan. This helps you qualify even if you don’t have valuable business assets.
• Eligibility requirements are more lax than standard business loans. Working capital loans are often offered through online lenders, which typically have lenient eligibility requirements. For example, they may accept a 600 personal credit score and six months in business, low requirements compared to other lenders.
• Eligibility requirements are more lax than standard business loans. Working capital loans are often offered through online lenders, which typically have lenient eligibility requirements. For example, they may accept a 600 personal credit score and six months in business, low requirements compared to other lenders.
• Funds can be used for any expenses. Working capital loans typically don’t require the funds to be used for a specific purchase. You’re free to use it on any expenses the business needs.
• Funds can be used for any expenses. Working capital loans typically don’t require the funds to be used for a specific purchase. You’re free to use it on any expenses the business needs.

Cons

• Higher interest rate than a conventional loan. These loans command higher interest rates to offset lending to riskier businesses like those with a low credit score.
• Higher interest rate than a conventional loan. These loans command higher interest rates to offset lending to riskier businesses like those with a low credit score.
• Shorter, more aggressive repayment. Short-term loans typically offer terms of 24 months or less, and they may require daily or weekly repayments. These terms can make it difficult for businesses to keep up with the repayment amount and schedule.
• Shorter, more aggressive repayment. Short-term loans typically offer terms of 24 months or less, and they may require daily or weekly repayments. These terms can make it difficult for businesses to keep up with the repayment amount and schedule.
• Loan amounts are often low. Lenders may offer you a low loan amount like $250,000 or less. The exact loan amount is based on your business’s financial profile and its ability to repay the loan.
• Loan amounts are often low. Lenders may offer you a low loan amount like $250,000 or less. The exact loan amount is based on your business’s financial profile and its ability to repay the loan.

How does a working capital financing work?

Working capital financing works 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.

Sometimes, 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.

How does business seasonality impact loan needs?

Some businesses find that their work has seasonal highs and lows. Businesses may sell more products or services during specific times of the year, while they see fewer sales during some months. 

Ideally, businesses could predict this seasonality and prepare for it by saving a emergency fund. However, even the best planning can fall short sometimes. 

If a business finds themselves needing cash during the slow season, the business owner may get a working capital loan to bridge the gap until work starts coming in again.

Types of working capital loans

Many business loans can be used for working capital expenses, though there are loans designed specifically for working capital. Choose from these types of working capital loans based on your business’s needs.

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. 

The best small business lenders will offer competitive interest rates, manageable repayments and low fees to help you get the funding you need.

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.

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. Lenders often require high rates and fees unless you have strong credit.

SBA loans

SBA loans are loans guaranteed by the U.S. Small Business Administration and offered through approved SBA lenders. These loans  are designed to help business owners who can’t qualify for traditional financing. They offer large loan amounts up to $5 million, and the SBA sets maximum interest rates that a lender can charge.

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.

Eligibility and requirements for working capital loans

The exact requirements to be eligible for a working capital loan will vary based on the type of loan and lender you choose. Typical requirements include:

• Time in business. Online lenders often accept six months in businesss, while you may need two years in business if you go with a major bank.
• Credit score. Expect to need a personal credit score of at least 670 with traditional banks and credit unions. Online lenders often accept a 600 personal score, and some go even lower.
• Annual revenue. Lenders want to see that you have enough revenue and cash flow to cover loan repayments. Online lenders often accept $100,000 in annual revenue, while banks may want to see $150,000 to $200,000 annually.

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 or slow season in your business, consider which loan option works best in your situation. Before applying, compare the rates and fees that different lenders offer to get the best deal.

Frequently asked questions

• What is the impact of working capital loans on personal credit?
  

  Working capital loans can impact your personal credit in some instances. If you don’t have enough business credit history to show your creditworthiness, business lenders will pull your personal credit when assessing you for a loan. Any hard inquiries against your personal credit may cause your score to dip temporarily.

  In addition, if you sign a personal guarantee for the business loan, your personal credit may take a hit if you miss payments.

• How do working capital loans help seasonal businesses?
  

  Working capital loans help offset the seasons in which your business has lower or no revenue, allowing you to continue operating and growing even during off-peak seasons.

• How much working capital should you borrow?
  

  The amount of working capital funding to get depends on how much you need to fund your operating expenses as well as how much you can afford to repay.

  Lenders often use debt-to-income ratio (DTI) and debt service coverage ratio (DSCR) to determine if you’re able to repay the loan. In general, lenders like to see a debt-to-income ratio of 36 percent or less, showing that your debts only equal 36 percent or less of revenue. They also like to see a DSCR or 1.25 or higher, which shows how much revenue you have to cover all your debts.

• When should a business get a working capital loan?
  

  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.

• Can you get a working capital loan with bad credit?
  

  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.