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A working capital line of credit is a revolving credit line that you draw from, paying interest only on what you use. It can help you cover a cash flow gap during a down month when you need money for expenses like payroll or rent.
My name is Michael Baynes. As the co-founder of Clarify Capital, I've spent more than 15 years helping small and midsize businesses (SMBs) find the right financing. In my experience, SMBs most often confuse working capital lines of credit with working capital loans and business credit cards.
Below, I'll explain the differences, how it works, and the associated costs to consider.
| Financing route | Borrowing limit | Typical rate | Repayment structure | Funding speed | Commonly used for |
|---|---|---|---|---|---|
| Working capital line of credit | Up to $5 million | APRs starting at 6% | Revolving, 6 to 36 months, weekly or monthly payments | As fast as same day | Uneven expenses you can't time |
| Working capital (term) loan | $10,000 to $5 million | APRs starting at 6% | Fixed payments over 6 to 36 months, weekly, biweekly, or monthly | As fast as same day | One known cost with a known payoff date |
| Business credit card | Set by the issuer, based on personal and business credit | 20.99% average on balances carried | Revolving, monthly minimum payments | Available once the account opens | Small purchases you clear each month |
| U.S. Small Business Administration (SBA) 7(a) Working Capital Pilot line | Up to $5 million | Caps range from base rate plus 3% to 6.5% | Revolving, maturities up to 60 months, monthly payments | As fast as 2 weeks, typically 30 to 90 days | Lower cost when you can plan ahead |
| Invoice factoring | Up to 100% of invoice value | 0.5% to 5% per invoice per month | Settles when your customer pays, usually 30, 60, or 90 days | 1 to 2 weeks | Slow-paying business customers |
| HELOC used for working capital | Up to $750,000 based on available home equity | As low as prime | Revolving draw up to 5 years, terms up to 30 years, monthly payments | As fast as 1 week | Home equity plus a lower rate and longer payoff |
What Is a Working Capital Line of Credit?
A working capital line of credit isn't a one-time lump sum of cash like a term loan. Instead, you draw from it to cover day-to-day expenses, repay, and then draw again. Think of it as a reusable pool of money.
You can use a working capital line of credit to pay for short-term operational needs like payroll, rent, and inventory. But they're not great matches for anything that requires a longer repayment term, like a piece of property or equipment.
Let's look at an example. A lender approves you for a borrowing limit of $100,000. You draw $20,000 to cover payroll, and the remaining $80,000 stays available. As you repay, the available limit climbs back to $100,000. Some lenders set a draw period, a time when you're allowed to keep withdrawing money before you repay.
Expect to repay weekly or monthly, with interest charged monthly.
Common Uses for a Working Capital Line of Credit
Here's where I see SMBs get the most value out of the working capital line of credit.
Payroll costs
Draw what you need to pay employees when your accounts receivable is low
Buying inventory
Stock up ahead of a busy season or take advantage of a discount
Covering operating expenses
Pay for utilities, rent, and other expenses
Moving on a time-sensitive opportunity
Take advantage of one-time offers like a supplier discount
Unexpected expenses
Cover a last-minute repair without dipping into your cash
Filling a cash flow gap
Bridge a slow season or a late customer payment
Working capital lines of credit work for seasonal businesses, contractors that work on retainage (when a client holds back money until the job finishes), and any businesses with a slow-paying accounts receivable.
If you're looking to make a single large purchase, a term loan with a fixed monthly payment is usually a cheaper option.
Minimum Qualifications
$10,000 in monthly revenue
Your business must earn at least $10K per month in a business bank account.
500+ credit score
You can get approved with any credit score. But the better your credit rating, the better interest rates lenders offer. Your FICO score should be above 500.
Minimum six months in business
Your company should be operational for a minimum of six months. This shows business lenders that your company is sustainable and won't go out of business.
Have a business bank account
Your Clarify advisor will need three or four months of your most recent bank statements to verify income. This is just to see you're actually making $10K+ month in revenue.
Fees on Working Capital Lines of Credit
In my experience, everyone looks at the interest, but not everyone looks at the other fees. Here's what else can bump up your total cost when you're using a working capital line of credit.
| Fee | What it is | What to check |
|---|---|---|
| Origination fee | A one-time fee charged to set up the line of credit | Ask if it applies to the full limit or only what you draw |
| Draw fee | A charge each time you withdraw money from the line | How many draws you expect in a typical month |
| Annual or maintenance fee | A recurring charge to keep the line open | What the line costs in a year when you never touch it |
| Prepayment penalty | A charge for paying off the balance early | Whether paying down draws quickly costs you anything |
| Late or returned payment fee | A charge when you miss a scheduled payment | How the payment schedule lines up with your deposits |
Working Capital Line of Credit vs. Working Capital Loan vs. Business Credit Card
Let's compare working capital lines of credit, working capital loans, and business credit cards.
A working capital loan is a lump sum with a fixed repayment schedule. You know the payment and interest apply to the entire amount, whether you spend it or not. These are good options for single large purchases.
Business credit cards and working capital lines of credit both revolve, meaning you draw, repay, and redraw. Both only charge interest on the balance you carry.
The limits on a business credit card are usually smaller than a line of credit, but the interest rates are higher. The average interest rate on a business credit card is 20.99%. By comparison, the average APR for a business line of credit ranges from 6.99% to 7.91%. Business credit cards can work for small purchases that you clear every month, but can get expensive if you carry a balance.
Using a HELOC as a Working Capital Line
If you own a home, you can use a home equity line of credit (HELOC) as a working capital line. It works similarly to a business line of credit. You get a revolving limit, pay interest on what you draw, and the limit refills as you repay.
You qualify based on your personal income, credit, and equity. Your house is collateral, so it's at risk if you can't repay.
Alternatives to a Working Capital Line of Credit
A working capital line of credit isn't the only option to cover cash flow gaps and other needs for your business. Here are some common alternatives.
Short-term working capital loan
A lump sum that you pay back in fixed installments that are determined in advance.
SBA 7(a) Working Capital Pilot line
A revolving line of credit backed by the SBA with lines up to $5 million.
Invoice factoring
A factoring company advances part of an unpaid invoice. Then they collect from your customer.
Merchant cash advance (MCA)
A lump sum of cash in exchange for a percentage of future sales. MCAs are fast, but also expensive.
Working Capital Lines of Credit for Slow Months and Big Moves
Working capital lines of credit help you cover cash flow gaps and take advantage of new business opportunities. Draw what you need when you need it, and pay it back later.
When you're ready to see what you qualify for, apply today and a Clarify Capital lending advisor will walk you through your options.
Working Capital Line of Credit FAQ
These are straight answers to the most common questions about working capital lines of credit.
What Is a Line of Credit for Working Capital?
A working capital line of credit is a revolving credit line. You draw what you need and pay interest only on what you use. It can help you cover a cash flow gap during a down month when you need money for expenses like payroll or rent.
Are Working Capital Lines of Credit a Good Idea?
It depends on your expenses. Lines typically cost less than a lump-sum loan when you can pay it back quickly. It costs more than a term loan for a large balance that you keep for a long stretch of time.
How Do You Get a $100,000 Business Line of Credit?
Lenders set borrowing limits on your average monthly revenue, time in business, business credit score, and the deposits in your business bank account. In general, good credit and strong revenue help you qualify for better terms.
Is My Information Safe When I Apply?
Yes, Clarify Capital follows SOC 2 security principles, and your application is a soft credit inquiry. Checking your options won't impact your credit score.
Michael Baynes
Co-founder, Clarify
Michael has over 15 years of experience in the business finance industry working directly with entrepreneurs. He co-founded Clarify Capital with the mission to cut through the noise in the finance industry by providing fast funding and clear answers. He holds dual degrees in Accounting and Finance from the Kelley School of Business at Indiana University. More about the Clarify team →
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