Working Capital Line of Credit: What It Is and Best Options

What is a working capital line of credit?

• Rent.
• Payroll.
• Utilities.
• Inventory.
• Supplies.
• Emergency expenses.
• Employee training.
• Large order fulfillments.

How a working capital line of credit works

Working capital loan vs. line of credit

Pros and cons of working capital lines of credit

Pros

• Flexible use. You can use a working capital line of credit for a wide variety of purposes, including paying rent, buying inventory or covering emergency expenses. These products are an ideal short-term financing option for bridging cash flow gaps, especially during seasonal changes.
• Revolving structure. Most working capital lines of credit are revolving. Unlike with a business term loan, you can draw from your credit line whenever you need access to funds and pay interest only on the money you borrow. And as long as you make your payments on time, you can continue to draw on the line, up to your limit.
• Can be quick to fund. Some online lenders can provide capital in as little as 24 hours, and most can within a few business days. Traditional lenders, like banks and credit unions, may be slower to fund.

Cons

• Can be expensive. Annual percentage rates (APRs) on working capital lines of credit can vary greatly — ranging from 10% to 80%. Depending on the lender, you may also face origination fees, account maintenance fees, draw fees or other additional charges. Although online lenders are fast to fund, they’re likely to charge higher rates as a result. Traditional lenders are more likely to offer the most competitive interest rates and terms.
• May have frequent payments. As a type of short-term financing, working capital lines of credit might require more frequent payments than some other business loan options. Although bank and SBA lenders may offer monthly payments, many online lenders will require a weekly repayment schedule.

How to get a working capital line of credit

1. Understand the requirements

• Personal credit score. In general, the stronger your credit score, the more financing options you’ll have available. Traditional lenders will usually require that you have fair to good credit — ideally a score of 650 or higher — to qualify for their products. Online lenders, on the other hand, are often more flexible. You may be able to qualify for a credit line with a personal credit score as low as 600.
• Time in business. Similar to your credit score, lenders prefer to see that you have an established business history. Some (but not all) banks will ask to see two or more years in business, whereas online lenders may require only six months or more.
• Annual revenue. Minimum annual revenue requirements can range, but overall, you should be able to show your lender a history of solid financial performance. It can also be helpful to present strong cash flow and sales projections.

2. Research and compare lenders

• Credit limits.
• Interest rates and fees.
• Repayment terms.
• Funding speed.
• Application process.
• Customer support.
• Lender reputation.

3. Gather your documentation and apply

• Personal information about you and any other business owners.
• Basic business information and paperwork.
• Personal and business bank statements.
• Personal and business tax returns.
• Business financial statements (e.g., profit and loss statement, balance sheet).