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What is Working Capital?

The term “working capital” refers to all assets that are currently available for covering monthly business expenses, or operational costs. Payroll, rent, supplies, vendor bills, debt payments are typically covered by working capital. In addition to keeping your business up and running, working capital is used to fund business growth.

How Do I Know If I Have Enough Working Capital?

To calculate your business’s working capital, simply subtract your current liabilities from your current assets.

Current Assets = What your business owns (Cash, Inventory, Accounts Receivable, etc.)

Current Liabilities = What your business owes (Bills, Payroll, Loans, Accounts Payable, etc.)

Working Capital = Current Assets – Current Liabilities

Your current assets must exceed your current liabilities in order for your working capital to be considered healthy. If your current liabilities exceed your current assets, you won’t be able to meet short-term obligations. So, it’s safe to say you should always know how much working capital you have on hand.

Calculating Your Working Capital Ratio

The aforementioned calculation will produce an amount in dollars. Sometimes, looking at this number won’t immediately tell you if you have sufficient working capital. Calculating your working capital ratio will give you a much clearer answer.

This formula is also very simple:

Current Assets / Current Liabilities = Working Capital Ratio

If the answer to this calculation is below 1, you have negative working capital. An ideal working capital ratio is between 1.2 and 2.0. This denotes that you have more than enough cash on hand to cover business expenses. Anything higher than 2.0, however, might mean that you are not plugging enough money into your business or investing in growth.

What Causes Insufficient Working Capital?

A host of circumstances can create insufficient working capital: lack of sales, too much unused inventory, or mounting unpaid receivables. No matter the cause, insufficient working capital must be corrected as soon as possible.

Supplementing the missing working capital with borrowed funds is often a sensible solution. Working capital loans can help your business stay vital while minimizing residual damage.

Several types of business loans are designed to cover short-term investments or expenses, and must therefore be paid back in shorter time frames. In most cases, the funds are used to finance day-to-day operations for a couple of months. You can also take advantage of sudden opportunities, like discounted inventory.

Best Business Loans For Working Capital

Here are the best types of business loans for this purpose:

  • Short-Term Business Loans: You are given a lump sum that is paid back via fixed or variable monthly payments. Terms can range from 3-18 months.
  • Working Capital Loan: Very similar to a short-term business loan, except the amount is directly based on the monthly costs of running your business. Payments can be collected daily, weekly, or monthly.
  • Business Line of Credit: You are given a credit line that you can borrow from at any time. Payments are only made when you borrow.
  • Merchant Cash Advance: You receive a lump sum that is paid back via a fixed percentage of daily debit and credit card sales.
  • Revenue Based Business Loan (Business Cash Advance): Similar to a MCA but your payments are deducted via a fixed percentage of your entire monthly revenue.
  • Invoice/Accounts Receivable Factoring: The financial institution purchases your outstanding invoice/receivable for a discount price and pays you right away.

Where To Find Business Loans For Working Capital

Banks typically do not work with borrowers with low working capital, nor do they offer most of the products featured above. Alternative/online financial institutions, on the other hand, have much looser requirements and more products to choose from. Applications can also be approved in as little as 24 hours

Here are some of the best financial institutions for working capital, followed by their products and general requirements:


Kabbage offers just one program; a business line of credit. A minimum personal credit score is not required, but a score of at least 500 is preferred. Borrowers must be in business for at least one year and have an annual revenue of at least $50,000. You can borrow up to $250,000.


Ondeck offers short-term business loans and lines of credit. For short-term business loans, borrowers must have a personal credit score of 500+, 1+ years in business and $100,000+ in annual revenue. For business lines of credit, borrowers must have a personal credit score of 600+, 1+ years in business and $100,000+ in annual revenue. Most borrowers reportedly have scores of 660 or higher.

For short-term business loans, you can borrow up to $500,000, compared to $100,000 for a business line of credit. Payments for short-term business loans must be made daily or weekly.


BlueVine offers business lines of credit and invoice/accounts receivable factoring. For a 6-month business line of credit, borrowers must have a personal credit score of 600+, 6+ months in business, and $120,000+ annual revenue, 12-month line of credit: 620+ personal credit score, 2+ years in business, $450,000+ annual revenue.

You can borrow up to $2,000 – $250,000 for each LOC. Invoice/Accounts Receivable Factoring: 530+ personal credit score, 3+ months in business, $100,000+ annual revenue. You can borrow $20,000 – $5 million.

Credibility Capital

For a short-term business loan, borrowers must have 680+ personal credit score, 2+ years in business, and $250,000+ in annual revenue. You can borrow up to $250,000.


For a short-term business loan and business line of credit, borrowers must have 600+ personal credit score, 1+ year in business, and $75,000+ annual revenue. You can borrow up to $250,000 for both. For invoice/ accounts receivable factoring, borrowers must have 540+ personal credit score, and 1+ year in business, with no requirement for annual revenue. You can borrow up to 90% of invoices and 80% to 90% of government contracts.

United Capital Source

United Capital Source offers all of the programs listed above. For all five, borrowers must be in business for at least six months and earn $100,000 in annual revenue. Borrowers with low credit scores (around 500) can be approved for short term business loans, merchant cash advances, business lines of credit, and revenue based business loans.

You can borrow up to $250,000 for a business line of credit, $1M for a merchant cash advance, $10,000 – $5M for a working capital loan and business cash advance, and $10,000 – $10M for invoice/accounts receivable factoring.

Terms and Interest Rates

Here are the terms and interest rates for the products listed above:


Business lines of credit from Kabbage carry APRs between 24% and 99%. Monthly payments are a percentage of the amount borrowed plus another fee of between 1% and 10% of the amount borrowed. With the six-month plan, your fee is 10% for the first two months and 1% for the final four. The 12-month plan has higher fees in the first six months but drops to 1% for the final six.


9% to 99% APR for short-term business loans, 3 to 36 months. 1% to 99.8% APR for LOC, 6 months.


15% to 78% for LOC, 6 or 12 months. 15% to 68% (Invoice/Accounts Receivable Factoring), 1- 13 weeks.

Credibility Capital

10% to 25% APR, 1-3 years.


9% to 40% APR, 3 to 36 months (short term business loan and business line of credit), 1% to 5.5% APR (Invoice/accounts receivable factoring)

United Capital Source

MCA (Factor rates starting at 1.09%, 3 – 18 Months), Business Line Of Credit (Interest of 8% and up, up to 18 months), Invoice/Accounts Receivables Factoring (Interest rates starting at 5.8%, Up to 24 Months),  Revenue Based Business Loan (Rates starting at 9%, 3 – 10 years). Short-term business loans/Working Capital Loans (Interest rates start at 9%, 3+ months.)

Required Documents

Here is the paperwork required for most of these products:

  • Driver’s License
  • Voided Business Check
  • Bank Statements
  • Credit Score
  • Business Tax Returns
  • Credit Card Processing Statements
  • Proof of Ownership

Before deciding on an institution, here are a few important factors to consider:

Future Financial Needs

Certain types of businesses are naturally prone to tumultuous cash flow or dips in revenue. They would likely benefit from a perpetual source of funds to cover business expenses every few months. A business line of credit is among the most effective tools for this purpose.

Instead of applying for business loans every time you need cash, you can just keep borrowing from your credit line. With a revolving business line of credit, your credit limit replenishes as you pay back what you owe. When you pay off your total balance, that same amount becomes available again.

Therefore, it is recommended to obtain a business line of credit before you actually need the money. When that time comes, you won’t have to worry about meeting business loan requirements amid slow revenue or low working capital.

Additional Business Loans

Let’s say your business is probably going to need additional working capital again, but not as often as every few months. If this is the case, you should look for a financial institution that is known for distributing multiple rounds of funding.

These institutions tend to reward repeat borrowers with increasingly convenient terms and interest rates. Paying off your first loan would likely make you eligible for a second, larger loan in the near future. 

Severity of your Cash Flow

Certain financial institutions are more willing to approve applicants with significant cash flow issues. They have no problem working with highly seasonal businesses, which may need enough extra working capital to get through an entire season.

So, when speaking with different institutions, ask if they have worked with businesses similar to yours. Institutions with more experience will be less likely to assign higher interest rates or restrictive terms.

Merchant cash advances and revenue business loans are two particularly advantageous products for highly seasonal businesses. Borrowers are allotted more time to pay off the debt in full, and a couple of slow months won’t increase your interest rate. Both products are therefore more appropriate for longer stretches of low revenue.

How To Build More Working Capital

The most effective strategies for improving working capital are essentially the same strategies for improving cash flow in general. Much like cash flow, the journey of increasing and stabilizing working capital never ends. Being proactive about managing working capital will also prevent you from taking on unnecessary debt later on.

Here are a few basic strategies for building more working capital:

Cutting Expenses

Freeing up as much cash as possible is perhaps the quickest way to increase working capital. So, take a look at your financial statements and see which expenses you can cut or reduce. Depending on severity of your financial health, it might be best to eliminate or temporarily suspend any expense that isn’t essential for day-to-day operations.

Seemingly small expenses can add up and should not be ignored. Even the tiniest savings can go a long way.

Don’t Order Too Much Inventory

Unused inventory is wasted working capital. And the longer an item sits on your shelves, the less profitable it becomes. The goal is to order the right amount of inventory at the right time.

What is stopping you from doing this? Maybe you need to improve forecasting of demand, which could allow you to only order inventory shortly before it will be sold. Many businesses utilize business lines of credit to maintain this strategy following sudden changes in demand.

Decrease Late Payments

An extremely common cause for insufficient working capital is unpaid invoices. Thankfully, there are numerous measures you can take to decrease late payments.

A popular tactic is sending more than one invoice per month, which is much easier with an automated invoicing system. If the traditional 30-day term is postponing most incoming payments until the end of the month, consider offering discounts to clients who pay early.

Talk To Suppliers and Credit Card Vendors

If you always pay your bills on time, you may be able to negotiate better rates or terms with credit card vendors or inventory suppliers. Inventory discounts are frequently rewarded to businesses that have amassed a lengthy track record of orders.

It’s important to not be hesitant about asking for discounts, especially when you have earned them. And if a supplier can’t offer a discount now, they may be willing to offer one in the near future.

More Ways To Build Working Capital

As your business grows, you may have to go beyond the basic principles to maintain healthy working capital. Business leaders that prioritize working capital do everything in their power to always have plenty of cash on hand. Here are some more innovative ways to improve cash flow and working capital in the process:

Do More With Fewer People

Saving money creates more working capital. While an appropriately-sized team is undoubtedly indispensable, you may be able to do more with less people. After all, asking current employees to perform additional tasks is cheaper than hiring new employees.

For example, instead of hiring a cleaning crew for your restaurant, you could pay your servers a little more to stay later a few nights a week. A retailer could pay a few sales associates a little more to manage inventory instead of hiring stock clerks.

Eliminate High Interest Debt

Debt is another common obstacle of healthy working capital. The debts with the highest interest rates are costing you the most money and for that reason should be eliminated as quickly as possible.

So, instead of continuing to make minimum payments, see if you can afford to pay a little more each month. Once that debt is paid off, apply the same principle to the debt with next highest interest rate, and so on.

Automate Tasks

Automation has become increasingly popular because it can help virtually any type of business make and save more money. Think of all the time you spend on monotonous, manual tasks. This is time you could be spending generating revenue.

For example, rather than composing and sending invoices yourself, you could use an invoice management system. The same concept can be applied to email pitches, which could bring in more business at a faster rate as well.

Consider Raising Prices

Low pricing is among the easiest ways for new businesses to steal customers from their competitors. This strategy may prove effective early on, but growing businesses need more money to sustain themselves. When was the last time you looked at your competitors’ prices? If most of them charge more than you, a slight price increase probably won’t scare anyone away.

A typical example of a slight increase is no more than 5%. Let’s say your business grossed $200,000 in sales in 2018. If you made the same sales this year but raised your prices just 2.5%, you could reap an extra $5,000 in profits.

Staying On Top Of Working Capital

Working capital should be monitored on a regular basis because it is so crucial to success. A growing business gradually takes on more expenses and brings in more revenue. Throughout this process, take time every month subtract liabilities from assets and make sure your working capital ratio doesn’t fall below 1.

You will know right away if your working capital is too low to sustain your operational costs. When speaking to financial institutions, you will know exactly how much funding to ask for. Institutions are much more likely to work with borrowers who are well-aware of how they got into this situation.

Remember: Working capital loans are a tool, not a crutch. Your short-term obligations are instantly covered. So, once you are approved, it’s time to put the aforementioned strategies into action.

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