Working Capital Loans: How to Find and Manage

By Daniel Lewis
Advertiser disclosure

Working capital is the lifeblood of any given enterprise. It refers to the capital necessary for the day to day running of the company and is a primary measure of its operational efficiency and liquidity.

This is why all businesses invariably need to apply for a working capital loan at some stage of their life-cycle.

Best Working Capital Loan Providers

So, how to find and manage working capital in order to stay liquid and operational? Whether you are a new technology startup or a 5-year-old restaurant owner, you need to have the right level of working capital available. If you don’t, there are a number of online lenders that offer competitive terms and conditions. The best of these include:

lending clubLending Club is the world’s largest peer to peer lending marketplace connecting loan lenders with applicants. They offer a range of loans, including the working capital loan up to $500,000.

kabbageKabbage offers a business line of credit, which can assist with working capital expenditure. There is a business credit card connected to this line of credit for ease of purchase. The line of credit extends up to $250,000.

ondeckOndeck provides term loans and business lines of credit to US businesses that meet its eligibility requirements. The term loans range up to $500,000 and the lines of credit up to $100,000.

LoanBuilderLoanbuilder is a service offered by PayPal that provides short-term loans with very low rates. Loans up to $500,000 are available, and applicants must be in business for 9 months.


All of these lenders can provide the essential working capital necessary to keep companies up and running. The terms and conditions may vary, but the credit rating requirements are typically low – 560 for Kabbage, 550 for Loanbuilder, 600 for OnDeck and Lending Club, with no minimum credit requirements for Fundbox.

Usually, companies need to be in business for at least 12 months to qualify, but with Fundbox it is as short as 3 months for both invoice financing and lines of credit. With Loanbuilder, businesses must be at least 9 months old. Most businesses are required to have between $50,000 –  $100,000 in annual revenue to qualify for these loans.

A lack of working capital is a big problem. What happens is that you won’t be able to repay your creditors on time. This will include any outstanding loans that you have.

As a result, you will start to incur more debt due to the interest accrued for late repayments. It could also annoy your distributors if you keep continually missing payments or paying them back late. This is unprofessional and sends out the wrong message to the people that you work with.

A Deeper Look Into Working Capital

A working capital loan is the most common kind of loan. After all, it is capital that keeps a business running, and working capital is the most important kind in order to keep it operational.

It is a general type of loan that is used to pay utilities, wages, materials, transport, third party services, etc. For the purposes of accountancy and business evaluation, the working capital of a business is calculated by subtracting the current assets from current liabilities.

Examples of business assets include inventory, cash, and money owed, often known as accounts receivable. All of these are described as current assets.  Next, the current liabilities are tallied. These current liabilities will include short term loans, accounts payable, and expenses. In short, liabilities are all the money that you need to pay out on a short term basis, whether to suppliers, banks, or other third-parties.

The current assets are subtracted from the current liabilities to give a clear indication of how much working capital a company has. Needless to say, the more working capital that a company has, the better, even if this is not the full picture.

Working Capital Loan Types

Most loans applied for are actually working capital loans. It is the most common kind of loan needed for the aim of maintaining and growing a business enterprise. Many popular kinds of loans could also be termed working capital loans. Examples include:

  • The SBA(7)(a) loan – This loan is guaranteed by the Small Business Association up to 85% and is the most common option for US business owners. The repayment term is long and the interest rates are low with the SBA(7)(a). Check out all of the SBA loan programs
  • Invoice financing/Invoice factoring Invoice loans can serve as a kind of working capital loan. It allows businesses to collect money for their outstanding invoices immediately, without delay. This frees up short term cash, though it reduces the total amount of current assets over the long run, as you won’t get the full value for the invoices.
  • The business line of credit – The line of credit is given to companies who draw upon it as needed in order to pay down current liabilities. It is perfect for businesses with frequent and large daily expenses and liquid cash flow.
  • The short term loan – The common short term loan is really just a working capital loan, designed to cover short term expenses such as payroll and utilities.

Many banks and online loan providers will offer a straight ‘working capital’ loan. This will allow you a greater degree of flexibility in terms of what you spend the funds on, as opposed to more specific loan options. Working capital loans are not used to buy long-term assets. So equipment financing and real estate loans would not constitute a working capital loan.

Do You Have Enough Working Capital?

Working capital is expressed as a ratio. This makes it a lot easier to understand how much you have available. A ratio of 1.0 means you have exactly $0 in working capital. You might have $500,000 in current assets and $500,000 in liabilities. You are cash neutral, which is not ideal, but it could be worse.

If you have $600,000 in current assets and $200,000 in current liabilities, this means that you have a working capital ratio of 3.0. You have $400,000 in working capital. If you have $600,000 in current liabilities and $200,000 in current assets, then you have a working capital ratio of -3.0. You are in debt of $400,000.

Few lending institutions would be willing to take on this risk, as you are unable to manage your existing debt issue. It is more likely that you would go into default if you managed to acquire additional capital with a ratio of -3.0.

The Ideal Amount of Working Capital.

A working capital between 1.2 and 2.0 is generally considered optimal. Higher than this and you need to invest more in your company, though it is easy to assume that higher is better.  Still, a working capital ratio that is too high is far better than a negative working capital ratio. There is nothing wrong with excess reserves.

It is important to remember that the working capital ratio can be a little misleading. For example, you might have a large inventory list that is on the books as a large asset. But in practice, this inventory might be hard to move quickly and is not really reflective of true working capital. This is just one example.

Sometimes, this ratio can be low and the business will still be healthy, such as a company with a flexible business line of credit. With the line of credit, there is no need for them to have large cash reserves, and they have the capability of paying back debts even with a low working capital ratio, due to this line. For this reason, the working capital ratio of a company has to be assessed with care.

The working capital ratio is a rough but important gauge when determining the value of a company. For larger loans, the amount of available working capital will play a more prominent role in determining whether or not you pass the application process. It shows you can be responsible for managing your cashflow, something which lending institutions need to look out for.

Working Capital Loans – Essential for All Businesses

Of course, you could easily say that many of these loans actually decreases your working capital as you have to pay back this debt. All kinds of working capital loans have to be repaid, typically on a monthly basis, which is technically a current liability on your balance sheet.

But good business is about managing this debt carefully, in such a way that you are always cash positive. You can do this by not overextending yourself and making sure you have a healthy amount of working capital at hand so you are set for a bright future.

Working capital is essential for any business model. If you want to learn more about managing working capital and planning for long-term financial success, get in touch with Finimpact. We can help you take the right approach to financial planning. 

Daniel Lewis
Daniel Lewis
Daniel Lewis is an MBA accredited investment professional who wants to assist small business owners to gain access to finance. After going through many channels for funding, Lewis has found that getting the first loan right is vitally important for future success.