How to Apply for a Working Capital Loan | Bankrate (2023)

A working capital loan provides short-term funding for businesses that need cash for everyday operating costs like payroll, utilities and rent. Types of short-term working capital loans include lines of credit, term loans, invoice financing and Small Business Administration (SBA) loans.

Knowing what you need to apply for a working capital loan, how to decide which type is best and how to compare lending options can help you get the most favorable repayment terms. The following tips will help you choose the best working capital loan.

Know your credit score and report

Before you apply for a working capital loan, you should understand your credit score and how to review your credit report. Depending on the business loan you apply for, your personal or business credit will determine your eligibility and loan terms.

Personal credit

Your personal credit history is what lenders use to determine your ability to repay your debts. A personal credit score is a number between 350 and 850. The higher the number, the better your creditworthiness, which can help you qualify for more loans with better repayment terms.

You can use your personal credit to apply for open credit, like a cell phone plan, revolving credit on a credit card or installment credit, which can be student loans, a mortgage or a personal loan.

Many lenders will use your personal credit score for business credit, especially if your business is structured as a sole proprietorship or you’re a new business and don’t yet have a business credit score.

Business credit

Like personal credit, your business credit score shows the creditworthiness of your business and how well it can repay its debts. Popular business credit bureaus like Dun & Bradstreet and Experian have business credit scores that range from 1 to 100, while the FICO Small Business Scoring Service (SBSS) uses a scoring range of 0 to 300.

Business credit scores and reports are made up of several factors:

  • Credit history age
  • Payment history
  • Debt size and usage
  • Industry risk
  • Company size

Decide what type of working capital loan

Once you know where you stand financially, you’ll need to choose a type of working capital loan that best meets your short-term funding needs. There are many types of working capital loans to consider, including:

  • Term loan
  • SBA loan
  • Business line of credit
  • Business credit card
  • Invoice financing/factoring
  • Merchant cash advance

Weighing the pros and cons of each type of working capital loan can help you decide which of these short-term options is the right choice.

Figure out how much loan can you afford

Your funding needs and how much loan you can afford may differ. When taking out a working capital loan, you’ll have to take into consideration additional costs such as interest rates and fees. Knowing your budget protects your business from defaulting on repayments.

There are several factors to consider when determining your loan affordability:

  • Annual gross sales
  • Personal or business creditworthiness
  • Current debts owed
  • Financing type
  • Lender

As a general rule, lenders typically will provide loans between 10 percent and 30 percent of your annual revenue as a threshold for loan affordability. You can use a business loan calculator to determine your monthly payments.

Bankrate insight

To get an idea of business loan interest rates based on loan type or credit score, check out the following guides:

  • Average business loan interest rates
  • Average business line of credit rates
  • Average bad credit business loan interest rates

Compare working capital loans and lenders

Comparing lenders and loan types can help you choose which working capital loan is best for your timeline and funding needs. Check each lender’s fees, interest rate and terms of repayment. You should also consider the application process, how fast you can get funding and how the lender handles customer support.

Lender requirements can vary. Ensure you understand the lender’s business loan eligibility requirements so you can prepare for the application process ahead of time.

Examples of working capital loans

LenderWorking capital loanFeatures
Bank of AmericaUnsecured working capital loan
  • Fixed interest rates from 6.75%
  • Loan terms of 12 to 60 months
  • Must make at least $100,000 in annual revenue and have 2 years in business
Wells FargoBusiness lines of credit
  • Up to $150,000 for unsecured line of credit
  • Up to $1,000,000 for secured line of credit
  • Rates as low as 10% for unsecured line or 8.75% for secured line of credit.
OnDeckSecured working capital term loan
  • Up to $250,000 in financing
  • Repayment terms of 18 to 24 months
  • APR starts at 29.9%
  • May qualify for interest rate reduction with on-time repayments
National FundingUnsecured working capital loan
  • Get financing up to $500,000
  • Repayment terms of 4 to 24 months
  • Minimum personal credit score of 600
  • Must be in business for at least 6 months and earn at least $250,000 in annual sales
BluevineBusiness line of credit
  • Up to $250,000 in available credit
  • Interest rates start at 6.2%
  • Repayment terms of 6 or 12 months
  • Requires 625 minimum credit score
FundboxBusiness line of credit
  • Lines of credit from $1,000 to $150,000
  • Weekly interest rate starts at 4.66%
  • Repayment terms of 12 to 24 weeks
  • Requires minimum credit score of 600

Gather required documents and information

When selecting your preferred lender and loan type, you should carefully review the application process and what documents the lender requires.

Personal information may be required, even if the lender doesn’t need a personal guarantee. Be prepared to provide your full name, date of birth, address and Social Security number.

You may also need legal documents for the business, including:

  • Articles of incorporation
  • Your LLC operating agreement
  • Ownership structure
  • Business name registration
  • Business tax returns
  • Bank statements
  • Profit-and-loss statements
  • Outstanding debt information

Secured business loans require proof of collateral. If you’re applying for an SBA loan, you’ll probably also need a business plan, business history summary, lease information and financial projections.

Get ready to apply

After gathering the necessary information and documents, you should be ready to submit your application. Many lenders offer an online application through their website but applying face-to-face in a branch location might also be an option.

Early preparation will streamline the application process, leading to faster approval and funding. If more information is necessary during the underwriting process for approval, the lender will usually reach out by email or phone. Some lenders offer the ability to check your application progress online. After approval, you should receive funding within a few days.

Repayment strategy

Setting up the right repayment strategy before applying for a working capital loan can help prevent loan default. To manage your loan properly, you should:

  1. Make sure you understand your loan agreement.
  2. Have a realistic business budget setup.
  3. Pay your bills on time to prevent late fees, penalties and default.
  4. Minimize other debts, especially for loans with short repayment terms.
  5. Check your personal and business credit scores regularly.
  6. Speak with your lender before missing a payment to learn your options.

Bottom line

A working capital loan is a great way to pay operating expenses, especially during seasonal gaps. Taking the proper steps before applying for a short-term business loan can help you get the best loan terms and repayment structure.

Frequently asked questions

  • The credit score you need for working capital depends on the lender and loan type. The lowest qualifying credit score is usually 550, but having a higher credit score can provide better repayment terms and more funding options. Most lenders require businesses to be established for at least six months to a year and have a minimum annual revenue of $100,000.

  • You can get a working capital loan with bad credit if other business requirements, like your annual revenue and time in business, are strong. Being in a less risky business industry can also improve your approval chances. If you have collateral to provide, like real estate, equipment or accounts receivable, consider a secured short-term business loan instead of an unsecured loan.

  • What happens if you default on a working capital loan depends on the loan type. For example, the lender can seize the property or equipment you used as collateral for a secured business loan. If you default on an unsecured business loan, your personal assets can be taken if you sign a personal guarantee. You may be eligible for deferment or settlement options if you have an SBA short-term business loan. If you can’t repay a working capital loan, the best course of action is to speak with your lender to see the available options.


What is required for working capital loan? ›

Your business should be operational for the past 2 years with your books in profit. However, it depends on bank to bank. Business Experience: Your business experience quantifies your loan eligibility criteria. Most banks accept a minimum of 2 years of the same business at the current business location in most cases.

What credit score do you need for working capital? ›

The credit score you need for working capital depends on the lender and loan type. The lowest qualifying credit score is usually 550, but having a higher credit score can provide better repayment terms and more funding options.

How does a working capital loan work? ›

Working capital loans work 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. In some cases, the lender will ask for bimonthly, weekly or even daily payments.

What are the collateral required for working capital loan? ›

Collateral: Working Capital Loans can be either secured or unsecured, i.e., you may or may not be required to pledge a collateral to avail of the loan. The options of collateral range from property, securities, gold, investments or the business itself.

Why would someone get a working capital loan? ›

Working capital loans are not used to buy long-term assets or investments; they are used to provide working capital to covers a company's short-term operational needs. Companies with high seasonality or cyclical sales may rely on working capital loans to help with periods of reduced business activity.

Why do people get working capital loans? ›

Working capital loans are often used to fund everyday business expenses like payroll, rent and operational costs and manage cash flow gaps during a business's slow season.

Do you pay back working capital? ›

A short-term working capital loan is a lump sum payment given to a business for operational expenses. You'll have to repay the borrowed amount within the terms you agreed upon with your lender.

What is the interest rate on a working capital loan? ›

Usually, the interest rate on a working capital loan can be between 16- 35% depending on the type of business you're running and how much you borrow.

What is the interest rate of working capital loan? ›

10.06% p.a. - 16.64% p.a. Banks like Bank of Baroda, RBL Bank, etc. also offer working capital loans. However, it is recommended you contact the bank directly for more information about the product or in case of any query related to working capital loan.

How long is a working capital loan? ›

The approval process for an SBA loan often takes weeks, or even months, though SBA Express loans and SBA Microloans generally will offer somewhat faster approval than other SBA loans. How long does a capital loan last? Working capital loans are generally short-term loans that last anywhere from six months to two years.

Is working capital loan a cash credit? ›

Working Capital Finance

Cash Credit facility is granted to the customers to bridge working capital gap. Cash Credit (CC) is granted against hypothecation of stock such as raw materials, work-in-process, finished goods and stock-in-trade, including stores and spares.

What is the working capital limit for banks? ›

2.2 In accordance with these guidelines, the working capital requirement is to be assessed at 25% of the projected turnover to be shared between the borrower and the bank, viz. borrower contributing 5% of the turnover as net working capital (NWC) and bank providing finance at a minimum of 20% of the turnover.

What is working capital limit? ›

Although many factors may affect the size of your working capital line of credit, a rule of thumb is that it shouldn't exceed 10% of your company's revenues.

Is working capital good or bad? ›

A 'healthy' working capital ratio is generally considered to be somewhere between 1.2 and 2.0. This shows sufficient short-term liquidity and good overall financial health. But if the ratio is too high, it could also be a problem.

What are two reasons why working capital is needed? ›

Why Is Working Capital Important? Working capital is used to fund operations and meet short-term obligations. If a company has enough working capital, it can continue to pay its employees and suppliers and meet other obligations, such as interest payments and taxes, even if it runs into cash flow challenges.

Is working capital just cash? ›

When it comes to business finance, the terms working capital and cash are often used interchangeably. However, there is a big difference between the two concepts. Working capital is a measure of a company's short-term financial health, while cash is just one of the assets a company can use to pay its bills.

How many months of working capital do you need? ›

You need enough working capital to cover your liabilities and expenses for the entire 60 days. If your customers frequently take longer to pay or if you want to provide a cushion against any unexpected work delays, you might want enough working capital to cover additional days.

Can I use working capital to pay myself? ›

But can you pay yourself? Yes, if the funding is there. According to the SBA, operating expenses, besides equipment, raw materials and staff payroll, "include your salary as the owner and money to repay your loans." Having said that, one major caveat is that you must be cautious in the amount you pay yourself.

Which is better term loan or working capital? ›

Ease of getting loan: For those with good credit score, a working capital loan is easier to get than a term loan. Repayment: Being a short-term funding options, a working capital loan has a very flexible repayment period/tenure. Meanwhile, term loans come with relatively longer repayment tenures.

Is working capital loan taxable? ›

Yes, working capital loans are considered taxable income for federal tax purposes. If you use the money to buy inventory or pay off debt, the interest on the loan will be included in gross income.

Are working capital loans tax deductible? ›

Any type of business loan, be it a term loan, a working capital loan, a small business loan, an equipment finance loan, etc., is considered to be tax deductible.

Where can I get a capital loan? ›

  • Best Working Capital Loans Of 2023.
  • OnDeck: Best For Short-Term Loans.
  • Lendio: Best For A Lender Comparison Site.
  • American Express Business Blueprint™
  • BlueVine: Best For Flexible Lines Of Credit.
  • National Funding: Best For Small- To Mid-Sized Businesses.
  • Fundbox: Best For Quick Approvals.

Which bank provides working capital? ›

Union Bank helps you in meeting the funds required for day to day operations of your business either by direct financing or by way of issuance of Letter of Credit.

What is the difference between term loan and working capital loan? ›

A working capital loan is short-term and has a few months of the repayment period. Meanwhile, term loans can be short-term, medium-term, or long-term. Term loans are usually between one and ten years, but they can last up to 30 years.

What are the problems with working capital? ›

High levels of overdue receivables and bad debt write-offs. Poor controls in relation to setting and managing payment terms of customers and suppliers. Lack of co-ordination between sales and planning, coupled with a lack of visibility on stocks.

What is minimum cash working capital? ›

The least amount of cash you will need to cover your expenses is your minimum working capital requirement. Your company needs to determine an acceptable level of working capital to match its needs. Once you know this required amount, make sure you have it available before factoring in sales numbers.

How do you calculate working capital eligibility? ›

To calculate working capital requirements, you can use the formula mentioned below: Working Capital (WC) = Current Assets (CA) – Current Liabilities (CL).

What are the three types of working capital? ›

Types Of Working Capital
  • Gross Working Capital.
  • Net Working Capital.
  • Permanent Working Capital.
  • Regular Working Capital.
  • Reserve Margin Working Capital.
  • Variable Working Capital.

What is an example of working capital financing? ›

Working Capital Loan

Very simply, a loan taken to finance daily business operations. For example, a business applies for a loan to cover the rental cost of the premises. Renting a premise would indirectly generate enough yield to pay the loan by maturity.

How does credit affect working capital? ›

If the suppliers offer a long credit period, the companies would have to rely less on working capital. The inventories are funded by suppliers' credit so it reduces the cash conversion cycle of a company.

What score does Capital One look at? ›

Your CreditWise score is calculated using the TransUnion® VantageScore® 3.0 model, which is one of many credit scoring models.

Is Capital One hard to get approved? ›

As long as you meet the credit score requirement and a few other requirements, it's not hard to get a Capital One credit card. As with all credit cards, you'll need to have a steady income and be at least 18 years old. You'll also need to have an SSN.

Which credit score is the hardest? ›

For example, FICO's score bands look like this.
  • Poor: 300–579.
  • Fair: 580–669.
  • Good: 670–739.
  • Very good: 740–799.
  • Excellent: 800+

What's a bad credit score? ›

A bad credit score is a FICO score below 670, meaning it falls in the fair or poor credit ranges. Along the same lines, a bad score in the VantageScore model is one below 661, which would belong in the fair, poor or very poor credit ranges.


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