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What is a working capital loan?
A working capital loan provides financing for everyday expenses of a business, such as hiring more staff, business expansion, adding inventory, financing accounts receivable, or any other general monthly capital needs of the business. “Working capital” is considered capital needs for short-term operational needs.
Capital expenditures (aka “Cap ex”), on the other hand, are cash outlays for items deemed to have long-term useful lives, such as purchases for real estate, equipment, or a business acquisition.
Obtaining a working capital loan under $350,000
For loans up to $350,000, many borrowers find the SBA 7(a) Small Loan program ideal. Unlike the Standard 7(a) program, banks look more toward the personal credit of the borrower, as opposed to the collateral of the business, when making an underwriting decision for a working capital loan for under $350,000. Most banks do not like offering working capital loans as, by definition, the working capital needs of the business are short-term, but the bank is making a loan with a ten-year term.
Loan term: 10 years
Interest: 5% – 6%
Max loan: $350,000
% of loan solely for working capital: 100%
We can connect you with SBA preferred lenders who specialize in hard to finance Working Capital loans today. Just provide us some basic information at our Find a Lender page.
Obtaining a working capital loan over $350,000 (Standard 7(a) SBA loan)
For loans over $350,000, banks like to see hard assets in addition to working capital needs. Some bankers call working capital loans “airball loans” since there is no collateral attached to the loan. As mentioned above, working capital for small loan amounts is much easier to obtain than for large loans. However, banks will provide some working capital for a loan over $350,000, but the working capital portion, as a percentage of the total loan, should not exceed 20% to 30%.
Loan term: 10 years
Interest: 5% – 6%
Max loan: $5,00,000
% of loan solely for working capital: 20% – 30%
Below are a few examples of loans that have working capital components and the likelihood that each will get funded (assuming all other bank criteria have been met):
| Loan Amount | Cap Ex(1) | Working Cap(2) | Credit Score | Likelihood of Financing |
|---|---|---|---|---|
| $300,000 | 0% | 100% | 600 | Unlikely due to credit score |
| $300,000 | 0% | 100% | 700 | Likely |
| $1,000,000 | 50% | 50% | 700 | Unlikely since <$350K and >30% is for WC |
| $1,000,000 | 80% | 20% | 700 | Likely since WC <30% |
(1) Capital Expenditures (“Cap Ex”) are assets with long-term useful lives, such as purchase of equipment or real estate, a business acquisition, or a partner buyout.
(2) Working Capital (“Working Cap”) for assets with short-term useful lives or general business operating expenses, such as inventory, accounts receivable, rent, payroll, business expansion.
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