Working capital loan: When does your small business need one?

Published 11 March 2026

Table of contents

• What is a working capital loan?
• When do you need a working capital loan?
• Types of working capital funding
• Costs of a working capital loan
• Who qualifies for a working capital loan?
• How to manage working capital without a loan
• Steady your cash flow with Xero
• FAQs on working capital loans

Key takeaways

• Use a working capital loan for short-term needs to keep your business running, not for long-term assets.
• Choose a loan that works with your cash cycle so payments are due when cash comes in.
• Consider the loan's total cost, not just its rate, and make sure repayments align with your cash flow.

What is a working capital loan?

A working capital loan covers a business's everyday operating expenses, like rent, utilities, payroll, or inventory. These loans are named after how the funds are used – to cover working capital – rather than how the loan is structured. Different types of working capital loans appeal to a variety of businesses.

When do you need a working capital loan?

A working capital line of credit or loan can help any time you can't cover your operating expenses. Don't wait until your cash runs dry – keep an eye on your working capital ratio – your current assets divided by your current liabilities. If it dips below 1, you may need help covering expenses.

Here are three situations when you might need an extra injection of capital:

Getting through seasonal gaps in business

If you’re a seasonal business, a business working capital loan can help you get through the slow months.

Of course, loans cost money and working capital loan rates cut into your profits. So put money away during busy times so you have a cushion when the slow season hits. You might not have to borrow after all.

To cover payroll, operating costs, and supplier orders

If you need a little extra money to get you through, a working capital loan can help you stay on top of payroll, operating costs, inventory expenses, and supplier orders.

But borrowing money to cover expenses isn't sustainable. To protect yourself, think about your long-term finances. Make a plan to pay off the loan and stay on top of expenses in the future.

To cover late customer payments

Waiting for clients to pay you? Need the money now? Any working capital loan can help, but consider leveraging unpaid customer invoices to get these options:

• a bridge loan to help you get through until your customers pay
• a factoring loan – a short-term working capital loan where a lender gives you an advance on your outstanding invoices in exchange for a fee

The SBA has resources on how to get working capital loans for your business.

Types of working capital funding

Again, operating capital loans are named after how they're used – to boost working capital.

There are many types of loans out there – here are six of the most common:

Term loan

A term loan is when you borrow money that's scheduled to be repaid in installments over a certain period (a term) of time. For instance, your working capital loan may have a 6-month term or a 5-year term.

You pay most term loans in monthly installments. Interest rates may be fixed and stay the same for the entire term, or they may change periodically.

Working capital line of credit

A working capital line of credit is a revolving loan, which means you can use all of the loan's funds up to the credit limit, pay it off, and reuse the funds as needed. This is great for seasonal businesses or other businesses that regularly need extra money.

Invoice financing and factoring

Invoice factoring and financing help businesses get quick cash using their accounts receivable (money owed to the business).

With invoice factoring, a factoring company buys your invoices and takes over collecting payment from your customers. With invoice financing, you receive upfront cash based on the value of your invoices but continue to collect payment from your customers yourself.

With both, you typically get about 80% of each invoice's face value up front. Then, when clients pay, you get the remaining amount minus any fees owed to the financing or factoring company.

Merchant cash advance

This is a type of working capital loan where a business borrows money from its payment processor. You’re typically charged a fee, rather than interest – usually between 10% and 20% of the loan's value. Repayment is based on a percentage of card payments processed each day and may range from 2 to 20%.

SBA 7(a) working capital pilot

The SBA 7(a) is a pilot program designed to help businesses secure government-based working capital lines of credit. These loans are worth up to $5 million and offer repayment terms of up to 60 months.

If you’re unsure of how to get working capital loans from the SBA, you just need to find a lender that's qualified to offer these loans. Talk with your banker to see if your financial institution participates.

The SBA has more info on the 7(a) working capital loans and resources on other SBA-backed small business loans.

Business credit card

Many businesses use credit cards to cover expenses when working capital is low. On the upside, you don't have to provide collateral and can modify payments based on your budget. But on the downside, you’ll pay high interest rates and you’ll need a clear repayment strategy to avoid overwhelming debt.

Costs of a working capital loan

These loans cost you money. Here are some things to think about to help you decide whether it's worth it.

• Fees: With merchant cash advances or other fee-based loans, you commit to paying the whole fee, even if you pay off the loan early.
• Annual percentage rate: The APR shows you how much the loan costs as a percentage of its value over a year. For instance, a 10% APR on a $10,000 loan costs you about $1000 per year.
• Factor rates: This is what you lose compared with getting the invoice paid in full. For example, if the factoring rate is 80%, you get 80% of the invoice's value.
• Repayment schedules: Think about when payments are due and how they'll affect your cash flow.

Who qualifies for a working capital loan?

Eligibility criteria are based on the type of working capital loan. Most lenders look at your:

• credit score
• time in business
• revenue
• cash flow
• collateral and personal guarantees

If you're trying to get a working capital loan without collateral, lenders will ask for documents to verify these elements, such as sales records, profit and loan reports, and balance sheets. If you're applying for a loan based on collateral, you'll need proof of the asset's value.

How to manage working capital without a loan

A loan isn't the only option. Here are some tips to boost your working capital without one:

• Speed up receivables. Get your invoices paid faster to improve your cash flow.
• Control inventory. Track your sales and inventory carefully so that you keep enough in stock to satisfy customers, but not so much that you're wrapping up too much money in inventory.
• Have a strategy for paying your bills. Can you pay some bills late without incurring penalties or risking relationships? Or can you pay some bills early when you have extra cash on hand? The right strategy with accounts payable can help keep cash flow in tune with your working capital needs.

Steady your cash flow with Xero

Xero gives you the deep understanding of your cash flow that you need to stay on top of expenses all year long.

Xero generates clear, customizable cash-flow reports, so you can easily see if you have enough operating capital to cover your bills, or if it's time to consider a loan.

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FAQs on working capital loans

Check out the answers to these questions about working capital financing:

Who is eligible for a working capital loan?

Eligibility criteria for small business working capital loans vary based on the lender. Some lenders take into account your business's credit score and collateral, while others base your eligibility solely on your projected revenue or accounts receivable.

Are working capital loans a good idea?

It depends. Working capital loans are a way to get through the down season or cover expenses in an emergency, but they often come with higher interest rates or fees than other types of loans. You shouldn't rely on these loans to cover your business’s operating costs – if you're in that situation, it's time to revamp the budget and figure out where you can boost revenue or cut costs.

Where can I get a working capital loan?

A wide range of lenders offer working capital loans. These include banks, credit unions, alternative lenders, factoring companies, and payment processing companies.

Is a working capital loan a liability?

Yes – any time your business owes money to someone else, consider it a liability. Most working capital loans are short-term business loans, meaning they're classified as current liabilities in your accounting records. That's also how they appear on your balance sheet.