Key takeaways

  • There are many types of working capital loans to consider, including term loans, SBA loans, business lines of credit, business credit cards, invoice financing and merchant cash advances
  • When deciding on a loan, consider the loan’s fees, interest rate, terms of repayment and the lender’s eligibility requirements
  • Before applying, gather all the necessary documents and information and set up a realistic repayment strategy

A working capital loan is a small business loan that 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.

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

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, so be sure to weigh the pros and cons of each type.

Loan type Pros Cons
Short-term loan
  • Frequent payments
  • Short repayment terms
  • Expensive interest rates compared to long-term loans
SBA loans
  • Backed by the U.S. Small Business Administration (SBA) to increase accessibility
  • Lower interest rates and fees
  • Significant funding amounts
  • Extensive application process
  • Stringent qualification criteria
  • Extended funding time
Lines of credit
  • Access to a predetermined credit limit to draw from as needed
  • Interest only paid on what you borrow
  • Short repayment terms
  • Loan amounts lower than term loans
Business credit card
  • Flexibility to use money when and how you need it, up to your credit limit
  • Aids in tracking and overseeing your company’s expenses
  • Low rates
  • Good to excellent credit required
  • Limited protection
  • Business owner may be personally liable for unpaid debt
Invoice financing/factoring
  • Quick cash from your unpaid invoices
  • Easily accessible
  • High fees make it expensive
  • Depends on your customer’s  repayment habits
Merchant cash advance
  • High odds of approval
  • Collateral not required
  • Frequent payments, often daily or weekly
  • Uses factor rates, which can be expensive

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:


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, whether you have to have a business checking account, 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 lenders

Lender Type of working capital loans Top features
Bank of America Line of credit, Term loan
  • Option for unsecured lines of credit with lower annual revenue of $100,000
  • Low annual revenue requirement of $50,000 for cash secured line of credit
  • Repayment terms of one to five years for term loans
Wells Fargo Line of credit
  • Multiple line of credit options for businesses, including businesses with two or more years or less than two years time in business
  • Some lines come with automatic enrollment in rewards program  
OnDeck Term loan, Line of credit
  • Fast application process and fast funding if approved
  • Lower eligibility requirements: one year in business, $100,000 in annual revenue, personal credit score of 625
  • Prepayment incentive
National Funding Term loan
  • Fast application process and fast funding if approved
  • Early payoff discount
  • Tax savings possible
Taycor Financial Term loan, Line of credit
  • Loan amounts up to $1 million
  • Personal guarantee required
  • A minimum of three months in business required

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.

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.

Bankrate insight

In some cases, your business loan may be denied. To help you decide what to do next, check out these guides:


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.

  • 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.

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