a business owner receiving a payment in his business
Camino Financial
By: camino-financial
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Working Capital Loans Explained In Plain English (With Examples)

Find out how working capital loans work, their advantages and disadvantages, how to get one, and other pertinent information about this type of financing.

In this post, we focus on the best loan and answers to the most asked questions about working capital loans in simple, understandable language.

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Tables of Content
1. What is working capital
2. What is a working capital loan for small businesses
3. Types of working capital loans
4. Pros and cons of working capital loans
5. How to get a working capital loan
6. Working capital lenders
7. When should you consider a working capital loan? 
8. Embrace working capital loans
9. FAQs 

What Is Working Capital?

Working capital, also called networking capital, represents how many liquid assets you have available to maintain your day-to-day operations.

What are working capital loans? An example

Let’s say your business has $80,000 in current short-term assets which includes accounts receivable, cash in your business account, and inventory you can convert into cash right now.

Your short-term liabilities (total expenses you owe others) amount to $50,000.

In this example, your available working capital is $30,000, the difference between your assets and liabilities.

Your working capital ratio (current assets divided by current liabilities) would be 1.6.

A good working capital ratio should be between 1.2 and 2.0.

What Is a Working Capital Loan for Small Businesses?

Working capital loans are a financial product that can help your business increase its cash flow to sustain your business operations.

It’s not uncommon for businesses to experience gaps in their finances due to normal market shifts or seasonal slumps when revenue decreases. But when they do, they can access external financing to fill these gaps.

These small business loans help you normalize your finances whether you need money to cover planned or unforeseen expenses.

The funds aren’t normally used to make investments but do help you achieve long-term growth. 

How Does a Working Capital Loan Work?

Once the lender approves a working capital loan, the borrower repays the loan at a fixed payment amount which includes interest, closing costs, and the amount borrowed.

Working capital loans terms can be repaid for a minimum of 12 months or even several years.

In most cases, borrowers use the cash to increase inventory, work through a slow season, or meet a sudden demand for products and services.

The lender will take into account your credit, sales history, and ability to repay the loan to determine the APRs and loan amounts.

Approved loan limits could range from $2,000 to $500,000 with APRs averaging 10% to 99%.

Working Capital Loans Examples

A pool cleaning service and repair business operate for 8 months each year. The same business owner runs a snow removal service for the remaining 4 months.

He pays the same part-time employees during the winter business which generates less income than his pool business.

The business owner will have a shortfall of about $600 the first month until revenue starts coming in and gets a working capital loan for $1,500 he repays in 3 months.

He uses his emergency fund to draw from to repay the loan which he will replenish at the end of the snow season.

How to Use A Working Capital Loan

There are a few different ways that you can use a working capital loan.

  • One way is to use it to finance inventory.
  • This can be helpful if you need to purchase inventory in bulk or if you’re trying to buy inventory for seasonal items.
  • Another way to use a working capital loan is to cover operating expenses. This can include things like rent, payroll, and utilities.

Types of Working Capital Loans

Term Loans

Financial institutions, banks, and online lenders offer and have available these types of loans for a few months or up to 25 years.

At Camino Financial, we offer short-term funds and long-term funds that you can use as working capital.

If you meet our minimal requirements, you can get from $1,500 to $400,000 with annual interest rates starting at 12% in just 2 days.

A Business Line of Credit

Once you qualify for a predetermined loan amount, you take draws against the line of credit and make monthly payments.

The payments replenish your available line of credit so you can continue to borrow money as needed.

SBA Loans

The Small Business Administration matches its loan types to an applicant’s qualifications, purposes, and circumstances. Maximum loan amounts range from $50,000 to $5 million with rates from 5.5% to 13%.

Business Credit Cards

0% introductory offers allow business owners to make purchases without paying interest. Thereafter, variable rates range from 13.99% to 26.99%+. Most require a minimum credit score, offer rewards, and may charge fees.

Merchant Cash Advance

Borrowers receive a lump sum payment that they repay based on a percentage of their future credit card sales. The minimum daily payment reduces cash flow and the APR can range from 70% to 200%.

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Pros and Cons of Working Capital Loans

Small businesses should consider working capital financing to get funds before asking for merchant cash advances.

Below you can find the drawbacks and advantages to identify if it is the right option for your cash flow issues, investments, and other growth initiatives.


  • You get financial relief right away.  A loan for business capital provides instant cash to pay bills or use a portion of the funds to hire an employee, increase inventory, or market a new product line.
  • When choosing the right lender, you aren’t required to provide collateral to secure the loan.
    That means there’s less risk for you because you don’t jeopardize losing your business or personal assets.
  • By making fixed payments for a short period, you have access to money but you don’t spend years repaying the loan.
  • Most lenders don’t place restrictions on how you can use the money as long as it’s for business-related expenses.
  • Borrowers can find out within 48 hours or less if they qualify for a loan. If they don’t, they can apply for other types of financing.

Disadvantages of Working Capital Loans

  • A lender looks at your credit history, how long you’ve been in business, your business revenue, and other factors. If they consider your business riskier, they charge a higher interest rate which increases your monthly payment amount.
  • Having access to money quickly can tempt you to borrow more money than you can comfortably repay. You must be able to repay the loan. If you don’t, you’ll be back at square one—not having enough cash to cover expenses.
  • If you can’t repay the loan, it affects your credit history and ability to qualify for future loans.
  • Businesses with the best credit histories normally get the best rates. If you currently have bad credit, you will pay a much higher rate.

How to Get a Working Capital Loan

Use these steps when getting a working capital loan.

  1. Determine in advance how much money you can borrow to be able to make monthly payments.
  2. Compare lender requirements. Lenders may require a minimum credit score, annual revenue, and a specified time in business before you can qualify for a working capital loan. Make sure you understand what’s required of you before you complete an application for a specific lender.
  3. Once you’re ready to apply, gather required documents such as financial statements, proof of identity, tax returns, etc.
  4. Complete the application. A simple application still means you must make sure you provide all of the information a lender requests. Review your entries thoroughly and make any corrections.
  5. Submit the application. Wait for the lender to contact you. They should let you know within hours or a few days whether your application was pre-approved or declined. If you apply online, lenders allow you to submit your documents electronically.
  6. The lender may ask for other information before they approve the loan and send a loan agreement for you to sign.
  7. Once you agree to the lender’s terms, they process the loan and distribute the proceeds.
  8. Spend the funds wisely with a goal in mind to improve cash flow.

Requirements for Getting Working Capital Loans

Financial institutions and lender requirements vary widely.

  • Most online lenders have minimum requirements for revenue, the number of years in business, and specific credit score thresholds.
  • Repayment periods can range from 1 month to 6 years or more.
  • Brick and mortar banks have more stringent requirements.
  • They usually require collateral, a personal guarantee, offer minimum loan amounts starting at $100,000, and a business account to apply for a loan.


Lenders charge each applicant a specific rate based on their business credit profile. Rates range from 4% to 35.99% or more.

Common Working Capital Loan Terms

Typical repayment terms are for 1 year or less for small amounts.

However, for larger sums, businesses may decide to spread loan payments over a period of 5 years or more.

Working Capital Lenders

Below, you will find the lenders with the best working capital business loans. After reviewing them, you’ll be able to choose the one that best suits your needs.

Camino Financial

We’re an online lender committed to helping all small business owners. When others say NO, we say YES.

We have different types of loans that can meet your working capital needs.

For our small business loans, you can get up to $400,000. Just meet the following requirements:

  • Time in business requirement minimum of 9 months
  • $30,000 annual revenue or $2,500 each month.
  • You don’t require a previous credit score.
  • We accept both ITIN and SSN

Our annual interest rates range from 12.00% to 24.75% and terms 24 to 60 months.


They require one year in business, $12,000 monthly revenue, and a minimum credit score of 580. Loan amounts: $5,000 to $2 million.

Terms vary per lender. Lendio is not a direct lender but a platform to connect with various lenders to get the best deal.


A Kabbage working capital loan for a small business requires 1-year time-in-business, $4,200 monthly revenue, a minimum credit score of 640. Loan amounts: $1,000 to $150,000.

Six, eight, and 12-month loans with monthly percentage fees of 0.25% to 3.50%.


Time in business requirement 1 year, $8,500 monthly revenue, minimum credit score 600. Loan amounts: $5,000 to $250,000. Requires a business lien and personal guarantee. Starting rate 11.89%, 3 to 18-month terms.

Traditional banks and credit unions

In this type of financial institution, the requirements are more stringent and loan processing can take up to 1 month or more.

Established businesses with an existing banking relationship with these financial institutions may qualify for better rates and longer terms compared to online lenders.

When Should You Consider a Working Capital Loan?

Your business can hum along and show solid long-term growth on your balance sheet and profit and loss statement.

However, it’s not uncommon for businesses to have less cash than usual during slow periods when customers don’t pay as quickly or seasonal businesses receive revenue only at certain times.

Working capital loans help out in those situations but they’re also a good option to save your business money.

Vendors may offer one-time substantial discounts giving you an opportunity to increase inventory, buy materials, or upgrade equipment.

Moreover, repaying the loan helps build a positive credit history (if the lender reports to the credit bureaus) when you make payments on time month after month.

Regardless of your reason to get a working capital loan, you must be able to repay the loan, have extra money available for emergencies, and end up with a net operating profit after taxes.

Embrace Working Capital Loans as Your Next Step to Success

Balancing your cash flow each month is challenging when revenue declines all at once or an opportunity comes up you can’t pass on.

Getting a loan for working capital can help sustain or grow your business.

Camino Financial understands the business financing obstacles you face and has a range of financial products to choose from.

Because of our lenient requirements, borrowers may qualify for financing when already turned down by other lenders.

Apply for a small business loan today and let us help your business succeed.

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How do I determine the amount of working capital I need?

Based on your operating cycle (number of days it takes to receive accounts receivable payments, sell inventory, and pay business expenses) you can calculate your average working capital within the last 6 months of operation to use as a guideline.

Why is working capital necessary for a business?

A business can’t operate unless it has the cash to pay business expenses and other financial obligations with enough left over to make a profit.

Are loans working capital?

Financial institutions consider loans as short or long-term liabilities for accounting purposes until they are repaid. Borrowers may use a loan exclusively for working capital or another designated purpose.

How do I qualify for a working capital loan?

Know which lender requirements you can meet, the amount you can repay and whether the lender has restrictions on how to use the money before you apply.

How does a loan affect working capital?

Loan proceeds deposited into a business account are considered a current asset as well as a current liability. Working capital is affected negatively or positively when current assets or current liabilities decrease or increase.

Is a working capital loan suitable for my business?

Yes, if your business has a consistent profit and your working capital falls within a suitable ratio.

No, if you have a negative working capital month after month, can’t pay your bills, and probably couldn’t repay the loan.

What are the most common working capital loan requirements?

Typically includes a business plan, financials, and credit score.

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