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TJ Porter is a contributing writer for Bankrate with eight years of experience writing about finance. TJ writes about a range of subjects, from budgeting tips to bank account reviews.
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Robert Thorpe
Most recently before joining Bankrate, Robert worked as an editor and writer at The Ascent by The Motley Fool, covering a number of personal finance topics, including credit cards, mortgages and loans.
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Working capital loans are short-term loans that businesses can use to meet their day-to-day operating costs. They come in many forms, including term loans, lines of credit and alternative financing options.
Knowing the different types of working capital loans can help you choose the right one for your business’s needs.
A term loan is what most people think of when borrowing money. With a term loan, you’ll get a lump sum of cash and then pay the loan off through regular payments.
With working capital loans, payments may be more frequent than monthly. When you apply for working capital, lenders may ask for bimonthly, weekly or even daily payments.
These loans are useful if you need a one-time cash infusion but aren’t as helpful if you need long-term, flexible access to cash. They also aren’t the best option if you’re looking for the lowest interest rates.
Depending on your creditworthiness and the strength of your business financials, expect to pay about 6 percent to 30 percent or more in interest. The amount you can borrow will depend on the size of your business but expect limits of $50,000 to $150,000.
A business line of credit gives your company longer-term access to a revolving pool of cash. You can draw money from the line of credit multiple times whenever you need the funds. As long as you stay below the credit limit, you can keep taking money from the line of credit, making it a great choice for companies that need flexibility. You’ll only pay interest on the outstanding balance of the credit line.
Lines of credit usually have variable interest rates, meaning the interest rate could rise over time. That makes them less predictable than fixed-rate loans. You can also expect higher interest rates on a line of credit than with a term loan.
The U.S. Small Business Administration’s lending program makes it easier for small businesses to access financing. It insures lenders against defaults, which lets those lenders offer larger loan amounts.
Though some SBA loan programs have lengthy approval processes, they offer faster loans that work well as working capital loans.
| SBA loan program | Loan amount | Description |
|---|---|---|
| SBA 7(a) | Up to $5 million | The most common type of SBA loan. Can be used for a variety of purposes, including working capital. |
| SBA Express | Up to $500,000 | Quicker approval than traditional SBA loans. Use for daily operating expenses and other costs. |
| CAPLines | Up to $5 million | There are four types of lines of credit, each with different uses. |
SBA 7(a) loans have loan amounts of up to $5 million and repayment terms of up to 10 years when used for working capital. It can take up to 90 days to receive funds, but the capped interest rates make them one of the most affordable options. Some lenders like Lendio or Creditfy have relaxed eligibility requirements that can make them more accessible than the requirements found with banks and credit unions.
Bankrate insightPreviously, the SBA also had a Community Advantage pilot program, which ended in 2023. However, all lenders that participated in the program converted to Community Advantage Small Business Lending Companies ensuring underserved communities still have access to SBA loans and programs.
SBA Express loans are a type of SBA 7(a) loan. Unlike standard 7(a) loans, which have borrowing limits of up to $5 million and require approval from the SBA, Express loans are designed to be quick. They offer up to $500,000 and don’t require additional approval from the SBA. These loans can be secured or unsecured, with no collateral required for loans up to $50,000.
CAPLines are a type of 7(a) loan, offering lines of credit to small businesses. There are four types of CAPLines, each with different features and purposes.
| CAPLines Type | Use | Term | Amount |
|---|---|---|---|
| Contract Loan | To help companies finance the price of one or more contracts or purchase orders. | Up to 10 years | Up to $5 million |
| Builders Line | Solely for direct expenses related to construction or substantial renovations of an eligible property. Up to 20% may be the cost of the land. | Up to 5 years | Up to $5 million |
| Seasonal Line of Credit | To pay for seasonal increases in costs such as inventory, labor, or accounts receivable. It cannot be used to keep operating during slow times. | Up to 10 years | Up to $5 million |
| Working Capital Line of Credit | Short-term operating costs and working capital needs. | Up to 10 years | Up to $5 million |
Invoice financing and factoring rely on the value of your unpaid invoices to help you secure financing.
With invoice financing, you borrow money against the value of your invoices in the form of a loan or line of credit. You then pay the lender back once you get paid for the invoice. Invoice factoring involves selling your invoices to a lender for a percentage of their value. Your customers then pay the lender directly.
With invoice factoring and invoice financing, you are able to access more working capital without waiting for your customers to pay their invoices. If you have a lot of invoices, you can potentially borrow larger amounts. It’s also easier than other types of credit to get approved for, as your invoices serve as collateral.
There are some downsides to consider. Invoice factoring or financing can be pricey. You’ll lose 5 percent or more of the value of your invoices, which is a large chunk. You also become even more reliant on your customers paying the bills. Depending on the terms of your financing or factoring agreement, you’ll be on the hook to pay back the debt even if your customers never pay you.
Merchant cash advances are designed for companies that need quick funds to buy inventory or cover immediate costs. What sets them apart is that the amount you can borrow is largely determined by how much your company makes in daily sales.
Payment of this loan happens automatically, with the lender taking a percentage of your company’s daily credit and debit card sales until the loan is paid off.
Because your future sales automatically go toward payment, these loans can be easier to get than other types of financing, especially if you can show a long history of credit and debit card sales. But costs can be quite high.
Merchant cash advances use factor rates rather than interest rates, and those factor rates may be as high as 1.50. That means that for every $1,000 you borrow, you have to pay back $1,500.
Business credit cards work much like consumer credit cards. You can use them to make everyday purchases and can keep using them to access funds until you hit your credit limit.
One big benefit of business credit cards is that you can avoid paying interest if you pay your balance in full monthly. You can also use business credit cards to build business credit. Some cards also offer rewards like cash back, points or airline miles, making them even more appealing.
The drawback of credit cards is that their limits are usually lower than term loans and some lines of credit.
Typically, rates for the best business credit cards won’t exceed 30 percent. That’s higher than some loans, especially term loans or lines of credit from banks. But they are low compared to the rates found with other types of loans, including merchant cash advances or online business loans for companies with bad credit, where effective rates can exceed 50 percent.
A working capital loan is meant to cover your business’ everyday expenses. Because of this, they can be used for a variety of purposes, including:
The best working capital loans provide you with fast, short-term funding. But they aren’t the only way a business can borrow money. There are some other options for companies in need of financing.
Working capital loans come in many forms, each offering different ways to help your company meet its short-term financial needs. Consider the working capital needs of your business to choose the right type of loan. For flexibility, you may want to opt for a business line of credit, CAPLine or business credit card. For set expenses, your business may benefit more from the lower rates of a term loan or 7(a) loan.
No matter which type of loan your business needs, take the time to shop around for the best deal. The more research you do at the start of the process, the better off your business will be when covering its short-term expenses.
Working capital loan costs can vary significantly. Well-qualified borrowers getting a loan from a bank might pay about 6 percent interest. Companies with poor credit using merchant cash advances might pay factor rates of 1.50 or higher, which could be equivalent to interest rates of 80 percent or higher.
Every lender is free to set its own requirements, but working capital loans usually have less strict requirements than other types of financing. It’s possible to find lenders willing to work with you if you have a credit score of 600 or even lower. Companies with low credit scores might need to offer collateral or a personal guarantee to qualify.
Arrow Right Contributor, Personal Finance
TJ Porter is a contributing writer for Bankrate with eight years of experience writing about finance. TJ writes about a range of subjects, from budgeting tips to bank account reviews.
