What is a working capital loan?
A working capital loan is short-term financing for day-to-day business expenses — not capital purchases like equipment or real estate. Businesses use working capital loans to cover payroll between invoices, restock inventory before a busy season, or bridge a gap while waiting on a slow-paying customer.
Unlike a term loan you pay off over five years, most working capital loans run 6 to 18 months and are repaid from operating cash flow.
How lenders evaluate working capital needs
Lenders look at three numbers before approving a working capital loan:
Current ratio: current assets divided by current liabilities. A ratio above 1.2 means the business can cover its near-term obligations. Below 1.0 is a red flag — the business may already be in a cash deficit.
Days Sales Outstanding (DSO): how long it takes to collect on invoices. A DSO above 45 days in a business with 30-day terms signals a collections problem that a loan won’t fix.
Burn rate: how fast the business consumes cash each month. Lenders want to see that loan proceeds will bridge an identifiable gap, not fund ongoing losses.
Common types of working capital loans
Business line of credit: a revolving facility you draw from and repay as needed. Interest accrues only on the outstanding balance. Best for irregular cash gaps. Typical range: $10,000–$500,000.
Invoice financing: converts unpaid receivables into immediate cash (70–90% of face value), with the lender collecting the invoice and remitting the remainder minus a fee. Useful when customers pay slowly.
Merchant cash advance (MCA): a lump sum repaid via a daily percentage of card sales. No fixed term — repayment speed depends on revenue. The effective APR is typically very high (40–200%+). Use only when other options are unavailable.
SBA 7(a) loan: can be used for working capital. Longer terms (up to 10 years for working capital) and lower rates than most short-term products, but slower approval and more documentation required.
How much working capital does a business actually need?
The standard formula:
Working capital = current assets − current liabilities
A business with $120,000 in current assets and $80,000 in current liabilities has $40,000 in working capital. Whether that’s enough depends on the monthly cash burn and how predictably cash comes in.
A rough rule: maintain at least one to two months of operating expenses in liquid form. A business with $60,000 in monthly expenses should target $60,000–$120,000 in working capital before taking on significant growth spending.
What does a working capital loan actually cost?
Short-term working capital products are often priced with a factor rate rather than an APR. A factor rate of 1.25 on a $50,000 advance means you repay $62,500 total — but if you repay in 6 months, the effective APR is roughly 90%, not 25%.
Always convert the total cost to APR before comparing products. A 12-month term loan at 18% APR is dramatically cheaper than a 6-month MCA with a 1.3 factor rate, even though the factor rate sounds like a smaller number.
Use our working capital calculator to run the numbers for your situation before applying.
Run your own numbers. Use our calculator to apply these concepts to your situation.
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