Working Capital Loans

One of the most common reasons a business fails is a lack of working capital. Lack of capital can be due to mismanaged cash flows or a company simply running out of money. According to the U.S. Chamber of Commerce, cash flow problems, including lack of funding, are among the major reasons businesses collapse.

To help avoid these situations for your business, it's important to know how much your daily operations cost, where your revenues are coming from, and when you should take on financing to run and grow your company.

Every company needs capital to operate and grow. Fortunately, small business working capital loans can provide a lifeline. A working capital loan is a type of short-term financing that a business takes out to cover its daily operating expenses. These loans are specifically used to cover a company's current liabilities instead of buying equipment, real estate, or other long-term assets.

Keep reading to learn more about working capital loans and how they can help you grow your business.

What Is a Working Capital Loan?

Working capital is an accounting term used to describe a company's liquidity. When a business is liquid, it means it has enough money to meet its current, short-term obligations. Working capital is what you use to pay for day-to-day operating expenses like salaries, rent, and utilities.

A company needs working capital to fund and plan for sustainable growth. When a business doesn't have enough cash on hand to meet its working capital needs, it looks for loan options offered by banks and other providers like online lenders.

For example, working capital loans can provide small business owners with funding to keep their businesses afloat during low sales seasons. They can then use the funds to pay for any business expenses, including office space rent, inventory, salaries, and equipment repairs and maintenance.

Types of Working Capital Loans

Below are the different kinds of loans you can apply for that are considered working capital loans.

Short-Term Loans

A short-term loan is the most common form of working capital financing. A short-term business loan is an unsecured loan that gets you approved for a fixed loan amount. You'll pay it back in regular monthly payments plus interest for a specified term length (i.e., the loan term).

Business Line of Credit

With a business line of credit, you get access to capital with a set credit limit that you can use on an as-needed basis. It works the same as a credit card or a home equity loan. You only get charged interest and have to make payments for the amount you use.

Invoice Factoring

Invoice factoring, also called invoice financing, allows you to borrow money by using your accounts receivable as collateral. You can look at it as an advance on your unpaid invoices, possibly receiving up to 99% of your invoice amounts upfront. You pay the lender a factoring fee and they get their money back when they collect from your customers.

Merchant Cash Advance (MCA)

A merchant cash advance, also called a credit card processing loan, allows you to receive cash immediately in exchange for a percentage of your future sales. Like invoice factoring, it's an advance based on your company's creditworthiness, future sales, and past credit card receipts. Repayment is based on a percentage of the daily balance in the merchant account.

Real-World Working Capital Loan Example

To see how a working capital loan is used in practice, consider a common small-business scenario.

A retail store experiences a sales slowdown after the holiday rush. While revenue dips temporarily, fixed expenses like payroll, rent, and inventory restocking still need to be covered. The owner secures a $20,000 working capital loan to bridge the gap. The funds are used to pay employees on time and restock fast-moving items in preparation for the next sales cycle. As customer traffic rebounds in the following months, the business repays the loan from improved cash flow without disrupting day-to-day operations.

Situations like this highlight how working capital loans help businesses stay stable during short-term cash flow gaps while positioning them for continued growth.

Benefits of Working Capital Loans

Access to small business funding is critical to run a successful, growing venture. Being a type of unsecured business loan, they don't require borrowers to put up any collateral. They are an ideal fit for companies that are in a period of fluctuating cash flow.

Quick Financing Process

From application to money in the bank, the process takes just 24–48 hours. As a business owner, time is a precious commodity. Clarify's simple lending process lets you focus on running your business.

Ideal for Cash Flow Issues

When you need quick funding that is flexible on payment terms, small business working capital loans are an obvious choice. They provide an instant infusion of cash to pay for day-to-day expenses.

Maintain Complete Control

Unlike raising venture capital from an investor, a working capital loan allows you to keep full ownership of your company. You work hard to run your business, so reap the full benefits of the success!

Truthful, Clear Terms

Navigating small business loan terms can be overwhelming. Your dedicated Clarify partner breaks down your offers from lenders to help you make the right decision. We take pride in bringing simplicity to complex business needs.

Easy Approval Process

Almost all types of businesses with a credit score of 550+ can qualify for working capital financing. Clarify compares over 75 lenders to identify the best loan for you. We handle all the application paperwork to save you time and money.

Lower Cost With Tax Savings

Each calendar year, you can deduct any interest paid on a working capital loan. The interest being tax deductible further reduces the cost of financing.

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What Can Working Capital Loans Be Used for?

Working capital financing can be used for practically anything. However, many businesses use working capital loans when they need additional funds to pay for everyday business expenses while waiting for customer payments. Below are some common situations when you might want to take on a working capital loan.

Cash Flow Gaps

Sometimes, gaps in cash flow happen due to customers not paying on time or emergency situations, like broken equipment that needs to be repaired. A working capital loan can be used to bridge a short-term solution to the gap, ensuring your bills get paid on time.

Seasonal Lows

Many businesses make most of their sales during high sales seasons, such as the summer, winter, or holiday seasons. During seasonal slumps, however, companies may struggle because cash reserves can be used up quickly.

This is where working capital loans come in. This type of loan can provide the capital needed for companies to keep their businesses in operation even when there's less money coming in.

Operational Costs

Working capital loans provide a safety net for startups and new businesses to stay afloat while they grow and get more customers. This type of loan can be used to pay for expenses that accrue every day (e.g., rent, utilities, and payroll).

Additional working capital can also help your business grow. With more money, for instance, a business owner can take advantage of supplier discounts by purchasing in bulk.

Emergencies

Just like in your personal life, unplanned costs and emergencies happen to businesses, too. But what if a company has its money tied up in inventories or other investments? That's where working capital loans are used — these funds can cover urgent expenses and provide financial relief during emergencies.

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When Does It Make Sense To Use a Working Capital Loan?

A working capital loan is beneficial for businesses that need access to quick capital to cover operational expenses. This is because this type of financing is easy to apply and qualify for. Most forms of working capital loans are also unsecured, which means no collateral is needed to secure the loan.

While business owners can also get funds through equity financing, this requires them to give up a percentage of their ownership of the company. Working capital loans offer an alternative option for business owners who need additional funding but who also want to retain full control of their businesses.

If you're considering any type of business financing, make sure you understand your business needs. For instance, what do you plan to do with the money and how long will you need it? Before you take on any loans for your business, make sure you have a plan on how to pay that money back.

How Hard Is It To Get a Working Capital Loan?

Working capital loans are easily accessible and available for many different sizes and types of businesses. Most forms of working capital loans, such as short-term loans and business lines of credit, are unsecured, which is helpful for small companies that may not have current assets to secure a loan.

In addition, the application process is generally quick, and funding can be issued within a couple of business days. Thus, working capital loans are an obvious choice for companies looking for quick capital infusion with flexible repayment terms.

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Requirements To Get a Working Capital Loan

Whether you need cash to get through a slow sales season, deal with a broken piece of equipment, or take advantage of a business opportunity, working capital loans offer a quick way to borrow capital. Below are the top three eligibility requirements for securing funding with Clarify Capital.

Time in Business

Typically, your company must have been in business for at least six months to qualify for a loan. This is because lenders look at how long you've been operational to assess your creditworthiness. Your time in the industry represents how risky it is to lend to you. The longer you've been in business, the lower the risk for lenders to provide you with financing.

Average Monthly Revenue

For your company to qualify for working capital loans, you typically must be able to show that you generate at least $10,000 a month. Lenders use your monthly revenue to calculate the maximum loan amount you can qualify for. They also want you to show a solid income history to make sure you can afford to pay back your loans.

Credit Rating

Your personal credit score is one factor that lenders and financial institutions look at when you apply for any kind of loan. At Clarify Capital, we recommend borrowers have a minimum credit score of 550. Although you can secure working capital loans with poor or bad credit, your credit score determines the interest rate you get.

The higher your credit score, the better APR you'll receive. This is because a fair or excellent credit score means your credit history shows you've been responsible and repaid your loans on time in the past.

Trust Clarify Capital to Help You Get a Working Capital Loan

To run and grow a profitable business, it's important to get the funding you need when you need it. If you need accessible loans with flexible payment terms, it might be time to turn to working capital loans. The application and funding process is quick, and you're not required to put up any collateral.

At Clarify Capital, we handle all the loan application paperwork to save you time and money. We also know navigating small business loans can be overwhelming. That's why you'll have a dedicated Clarify partner who will work with you to choose the best financing option based on your business goals.

Get a working capital loan. Apply now and access same-day funding.

FAQs About Working Capital Loans

Here are answers to common questions about working capital funding from business owners like yourself.