Working Capital Loans Explained: Everything You Need to Know

Working Capital Loans Explained: Everything You Need to Know

Working capital is the financial fuel that keeps your business running day to day. It is the money available to cover operational expenses — payroll, rent, utilities, inventory, supplies — after you subtract your current liabilities from your current assets. When that number gets tight, a working capital loan can be the difference between seizing an opportunity and missing it entirely.

This guide covers everything you need to know about working capital loans, from how they work to how to qualify, so you can make the best financing decision for your business.

What Is Working Capital?

Working capital is a simple but critical financial concept:

Working Capital = Current Assets - Current Liabilities

Current assets include cash, accounts receivable, inventory, and any other assets you can convert to cash within a year. Current liabilities include accounts payable, short-term debt, payroll obligations, and other expenses due within a year.

Positive working capital means you have enough short-term assets to cover short-term obligations. Negative working capital means you could face difficulty paying your bills, even if the business is profitable on paper.

Many businesses experience working capital shortfalls not because they are failing, but because of timing mismatches between when money comes in and when bills are due. A restaurant might need to buy food inventory a week before the revenue from serving that food comes in. A contractor might complete a project in January but not receive payment until March. These gaps are normal, and working capital loans are designed to bridge them.

Types of Working Capital Loans

Several financing products fall under the working capital umbrella. Each has different characteristics suited to different situations.

Short-Term Business Loans

A short-term business loan provides a lump sum of capital with a repayment period of three to eighteen months. Payments are typically made daily or weekly via ACH withdrawal. These loans are fast to obtain and work well for businesses that need a defined amount of capital for a specific short-term purpose.

• Amounts: $5,000 to $500,000
• Terms: 3 to 18 months
• Approval time: 24 to 72 hours
• Best for: Covering a known expense or bridging a specific cash flow gap

Business Lines of Credit

A line of credit provides access to a revolving pool of funds that you can draw from as needed. You only pay interest on the amount you have drawn, not the total credit limit. As you repay, those funds become available again.

• Credit limits: $10,000 to $250,000
• Draw period: Ongoing as long as the line is active
• Interest: Only on the drawn amount
• Best for: Ongoing cash flow management, handling unpredictable expenses

Invoice Factoring

If your business invoices other businesses and waits 30, 60, or 90 days for payment, invoice factoring lets you sell those unpaid invoices to a factoring company for immediate cash, typically 80 to 90 percent of the invoice value. The factoring company collects payment from your customer and remits the balance minus their fee.

• Advance rate: 80 to 90 percent of invoice value
• Fees: 1 to 5 percent per month
• Funding speed: 24 to 48 hours
• Best for: B2B businesses with long payment cycles

Merchant Cash Advances

A merchant cash advance provides upfront capital in exchange for a percentage of your daily credit card sales. There is no fixed repayment schedule — the amount you repay each day fluctuates with your sales volume.

• Amounts: $5,000 to $500,000
• Repayment: Daily percentage of card sales
• Factor rates: 1.1 to 1.5 (meaning you repay $1.10 to $1.50 for every $1 borrowed)
• Best for: Retail and hospitality businesses with high card transaction volumes

Payroll Funding

Payroll funding is a specialized form of working capital financing designed specifically to help businesses meet payroll obligations during cash-tight periods. Missing payroll is one of the most damaging things a business can do, both legally and in terms of employee trust, so dedicated payroll financing products exist to prevent that scenario.

How to Use Working Capital Loans Effectively

Working capital loans are versatile, but using them strategically yields the best results. Common and effective uses include:

Covering seasonal slowdowns. If your business has predictable slow seasons, securing working capital before the downturn ensures you can cover fixed costs without cutting staff or services.

Taking advantage of supplier discounts. Many suppliers offer significant discounts for early payment, often 2 to 5 percent. A working capital loan that costs 1 percent per month can pay for itself if it lets you capture a 5 percent early-pay discount.

Bridging receivables gaps. When customers take 60 or 90 days to pay but your bills are due in 30, a working capital loan or line of credit smooths the gap.

Funding inventory purchases. Stocking up before a busy season or a major sale requires upfront cash. Working capital financing lets you buy inventory now and repay as you sell it.

Managing unexpected expenses. Equipment breakdowns, emergency repairs, regulatory changes, and other unplanned costs can derail a business that does not have a financial cushion.

Qualification Requirements

Working capital loans generally have more accessible qualification requirements than long-term business loans. Here is what most lenders look for:

• Credit score: 550 and above for most alternative lenders; 650 and above for bank lines of credit
• Time in business: 6 months minimum for many online lenders; 1 to 2 years for traditional lines of credit
• Monthly revenue: $8,000 to $15,000 minimum depending on the lender and product
• Bank statements: 3 to 6 months of business bank statements showing consistent deposits
• No recent bankruptcies: Most lenders require that any bankruptcy be at least 1 to 2 years discharged

The Cost of Working Capital Financing

Working capital loans tend to carry higher interest rates than long-term financing because of their shorter duration and the speed at which they are funded. Understanding the true cost is essential.

APR vs. Factor Rate

Traditional loans express cost as an annual percentage rate. Merchant cash advances and some short-term loans use a factor rate instead, which can be misleading if you are not familiar with the conversion.

A factor rate of 1.3 on a $50,000 advance means you repay $65,000 total. If the repayment period is six months, the effective APR is roughly 60 percent — much higher than it appears at first glance. Always calculate the APR equivalent before committing.

Total Cost Comparison

When comparing working capital products, focus on the total dollar amount you will repay rather than just the rate. A slightly higher rate on a product with lower fees and a longer term might cost you less overall than a lower-rate product with substantial origination charges.

Working Capital by Industry

Different industries have unique working capital challenges and opportunities.

Restaurants and Food Service. Restaurants deal with thin margins, perishable inventory, and daily cash fluctuations. Working capital loans help cover supplier payments, seasonal staffing, equipment repairs, and lease obligations during slow months. Merchant cash advances are particularly popular in this industry because they align repayment with daily sales volume.

Retail. Retail businesses need working capital to purchase inventory ahead of peak shopping seasons. A well-timed working capital infusion before the holidays can significantly boost annual revenue. Lines of credit are especially useful for retailers because they can draw funds for inventory purchases and repay as goods sell.

Construction and Contracting. Contractors often face large upfront costs for materials and labor before receiving progress payments from clients. Working capital loans bridge these gaps, allowing contractors to take on larger projects without cash flow strain.

Healthcare and Professional Services. Medical practices and other service businesses deal with insurance reimbursement delays that can stretch payment timelines to 60 or 90 days. Invoice factoring and working capital loans keep cash flowing while claims are processed.

Seasonal Businesses. Landscaping, tourism, event planning, and other seasonal businesses experience predictable revenue cycles. A working capital line of credit established during peak season provides a safety net for the off-season without the pressure of a fixed-term loan.

When a Working Capital Loan Is the Wrong Choice

Working capital financing is not the right solution for every situation:

• Long-term investments: If you are buying real estate or equipment with a useful life of many years, a term loan or SBA loan will cost far less over time.
• Chronic cash flow problems: If your business consistently spends more than it earns, a loan will only delay the inevitable. Address the underlying issues first.
• Debt stacking: Taking out a new working capital loan to repay an existing one is a dangerous cycle. If you find yourself in this situation, seek professional financial advice.
• Speculative ventures: Using working capital to fund an unproven business idea or risky investment puts your existing operations at risk if the venture does not pan out.

Getting Started

If your business needs cash to cover operational expenses, take advantage of growth opportunities, or smooth out seasonal fluctuations, a working capital loan could be the right move. Brevo Capital connects you with lenders who specialize in working capital products matched to your industry and financial profile.

Start your application today and get funded as fast as the next business day.