What You Need to Know Before Applying for a Working Capital Loan

  1. Working Capital
  2. What You Need to Know Before Applying for a Working Capital Loan

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Working Capital Loans

Working capital is one of the basic requirements for starting and running a business. You use it to pay for your company’s daily expenses, monthly bills, and other operational costs. You may even use it to cover small projects or activities that entail costs, such as launching a new marketing program or hiring new staff.

In business, you may encounter problems that force you to use up all your working capital. Without a source of funds, your business can’t continue operating. In that case, you can borrow from a financial institution, online lender, or loan marketplace. They provide working capital loans that you can use to replenish your bank account.

Depending on your chosen lender and your eligibility, the working capital loan you can take out may range from $10,000 to $500,000. But before applying for a working capital loan, make sure to do your homework.

Explore the features of a working capital loan and find out how it compares with other types of business loans. In this article, you’ll learn how a working capital loan works and why the life of your business may depend on it. You’ll also learn how to apply and qualify for the best working capital loan available.

What Is a Working Capital Loan?

A working capital loan is a short-term business loan used to finance a company’s day-to-day operations. Some businesses apply for a loan to raise a startup fund, while others do so to get through their business’ off-season.

What Can Working Capital Loans Do for Your Business?

A working capital loan allows your business to stay afloat during hard times or profitless months. It can even help bring in new income streams that can increase your resources. Here are some of the operational costs that a working capital loan can sustain:

  • Extra Staff – If you are planning to expand your business, you’ll need to hire more employees. A working capital loan can help pay for their salary until the expansion starts to yield a profit.
  • Payroll – Employee salary takes a significant portion of your monthly expenses. When your company is experiencing a downturn, you may run short of funds to meet the payroll. Taking out a working capital loan is your best course of action.
  • Debt Payment – Your financial obligations to others can slow down your business growth. Settle them using a working capital loan to avoid penalty and protect your credit score.
  • Marketing Campaign – Marketing allows you to find new clients. It’s one of the most important things that fuel your cash flow. If you lack the funds to launch a new marketing campaign, consider applying for a working capital loan. This investment is quite small compared to how much you’ll get in return.
  • Liquidity – Having trouble maintaining your company’s ability to convert assets into cash without loss? A loan may provide the solution you need. 

You can take out your working capital loan in a lump sum, but you can split it among a wide range of operational costs. Before you decide to take out a loan, you need to know your company’s financial health. This way, you can determine how much working capital you need to borrow.

One way to gauge your company’s financial health is to compute its working capital ratio (WCR). This is a numerical value ranging from 0 to 4, which represents your company’s financial state. It doesn’t tell you how much money you need to borrow but it may confirm your need for a working capital loan. Use the formula below.

Working Capital Ratio = Current Assets / Current Liabilities

The ideal ratio is between 1.2 and 2.0 because it indicates that your finances are normal. WCR lower than 1.2 indicates that you are already failing to pay your debts on time. WCR higher than 2.0 means your assets are stagnant and you need to invest more.

Who Provides Working Capital Loans?

Many small businesses turn to banks when they need working capital loans. But because of their strict criteria, only 27 percent of applicants get approved. Their loans come with high-interest rates, too.

It’s no surprise that many small businesses now go to online lenders and loan marketplaces. These are legitimate companies that provide quick alternative financing solutions. They’ve been helping small businesses in the U.S. maintain liquidity for almost four decades. Working capital loans are among their most popular products.

Benefits of Online Working Capital Loans Over Other Financing Types

Every year, online loan facilitators process thousands of working capital loan applications. Most of these come from startups and small businesses that don’t meet the criteria for bank loans. Because of its many benefits, working capital loans also appeal to established businesses.

  • Fast and easy to secure – Application takes no more than 10 minutes. All you have to do is fill out the online form, provide the required documents, and wait for the lender to notify you. Depending on the platform, the whole application process may only take 24 hours. You may get the money on the same day you applied as well.
  • Issued in a lump sum – Your lender will send you the loan in a lump sum. This allows you to address all your financial concerns at once.
  • You don’t need to give up equity and control – Your lender cannot take over your company if you fail to pay on time.
  • More options – Each online lending company offers something different to attract clients. This gives you more options than you can find in banks and other financial institutions. There’s a good chance you will find the exact working capital loan that meets your funding needs.

How Do You Apply for a Working Capital Loan?

Some business owners find the process of applying for working capital loans complicated. In reality, the process is pretty straightforward and only consists of several steps. It’s the loan terms and conditions that often make the entire process daunting. Follow these simple steps:

Step 1: Choose a type of working capital loan

Like other business loans, working capital loans are available in different types. Each of these types suits specific financial situations. Here are the most common working capital loan types available in loan marketplaces.

  • SBA 7(a) Loan – This type of loan is part of the U.S. Small Business Administration’s program for small businesses. Its purpose is to cover various business needs, including working capital. Because SBA 7(a) loans are government-backed, the application process takes longer. The chances of qualifying is also lower.


  • Business must be active for at least two years
  • Above-average FICO score
  • Enough gross annual income

Interest Rate

5.50% to 11% APR

  • Lines of Credit – If you can’t determine how much working capital you need, consider applying for a line of credit. This type of loan provides a cash cushion for unforeseen outlays. Your creditor will lend you a defined amount. You can access this fund as needed and pay off the amount you spent within a specified period of time.


  • Available to both SMEs and large corporations
  • Fair credit score

Interest Rate

7% to 65% APR

  • Term Loan – This type of working capital follows the basic financing arrangement. The creditor gives it to you in a lump sum, then you have to pay it back with interest in regular installments. This is why term loan is also called installment loan. The term and rate depend on the loan size and on your eligibility.


  • Business must be active for at least one year
  • At least average FICO score

Interest Rate

6% to 36% APR

  • Invoice Financing. Did you know that you can use your unpaid invoices as collateral for a working capital loan? Your creditor will lend you money on the condition that they can take over your unpaid invoices if you fail to pay. Small businesses struggling with inconsistent cash flow will find this loan useful.


  • You must have unpaid invoices

Interest Rate

1% to 6% of the invoice per month

  • Short-Term Loan – This type of working capital loan is like an installment loan. Your creditor issues it in a lump sum and you must pay in regular fixed installments. The only difference is that short-term loans don’t come with interest charges. Instead, each installment payment has a fixed fee attached to it.Short-Term Loan – This type of working capital loan is like an installment loan. Your creditor issues it in a lump sum and you must pay in regular fixed installments. The only difference is that short-term loans don’t come with interest charges. Instead, each installment payment has a fixed fee attached to it.


  • Business must be active for at least three months
  • Steady cash flow and strong revenue
  • Available even to businesses with low FICO score

Interest Rate

6% to 99% effective APR

Step 2: Choose a lender

Eligibility criteria and interest rate may vary from lender to lender. In some cases, even the required financial documents may also vary. The qualifications shown in this article are only basic. It’s possible that each lender has other requirements not shown on their websites.

After choosing a type of working capital loan, the next step is to look for a lender. Make a list of the top-performing online creditors and loan marketplaces. Narrow it down to only those that offer your chosen working capital loan type and have enough funds. Financial websites such as Lending Builder provide more information about your shortlisted lenders.

Step 3: Apply

Online lenders post the loan application procedure on their website. They try to make it as simple as possible to attract more clients and avoid mismatches. Here’s the basic application process you need to go through.

1. Fill out the online application form. Your chances of getting approved depends on the information you will disclose through this online form. It usually consists of four parts. One part contains basic questions related to your intent, such as how much funding you need, how soon you need it, and what you will use it for. The second and third ask for details about you and your business. The last part shows instructions for sending pertinent documents.

Some lenders, such as Cornerstone, take a more interactive approach. They assign a consultant to talk to each applicant. They believe this is the most effective way to match applicants with the working capital loan that best suits their financing needs.

2. Wait for the lender to notify you. The processing time depends on which lender you’ve chosen. But with today’s technology, it can take as little as three days. Some lenders can even process your application and notify you of the result within 24 hours.

3. Receive the money. Many lenders promise same day loan approval and release, but this isn’t always true. It’s safer to apply with the assumption that your lender will release the loan after several days. This way, you have plenty of wiggle room to deal with possible snags.

Understanding the basics of working capital loans is only the first step. There are plenty of other things you need to know to make the right decision. Websites like Lending Builder can teach you how to maximize this option.

Not sure where to go for a business loan? Read these quick & helpful guides:
Check out our preferred marketplace lenders.

Lender Minimum Revenue Time in Business Minimum Credit Next Steps
$100K/year 1 year 600+ See if you qualify
$10,000/mo 3 mo. n/a See if you qualify
$10,000/mo 3 mo. n/a See if you qualify
$75,000/yr 24 mo. 620+ Request Intro
Varies Varies 560+ See if you qualify

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