What to Know About Working Capital Loan Requirements

by Kieran Daly
|
February 18, 2025
What to Know About Working Capital Loan Requirements

Small business owners need to ensure they have the money to pay operational costs like rent, wages, utility bills, and more. When sales slow down or an unexpected bill comes in, this can be difficult. That’s when business financing through working capital loans can be invaluable in helping to bridge short-term cash flow gaps.

In this article, you’ll learn the working capital loan requirements lenders will expect you to meet and how to improve your chances of getting an approval.

What Is a Working Capital Loan, and Why Might You Need One?

A working capital loan provides your business with a short-term liquidity boost so that you can meet your day-to-day operating expenses. You can use the loan funds to buy materials if you land a big order or if you need extra cash while waiting for unpaid customer invoices to be settled.

The main types of working capital loans you can apply for are:

  • Short-term business loans: These small business loans are standard term loans, where you receive a lump-sum payment upfront that you repay over a maximum period of around 12 to 18 months.

  • Merchant cash advances: With a merchant cash advance, you borrow money against your future debit and credit card receipts with this loan option.

  • Invoice financing: Sometimes called invoice factoring, this is when you borrow money against your accounts receivables or unpaid invoices.

  • Business lines of credit: Like you would with a business credit card, a business line of credit lets you borrow up to a certain amount and only pay interest on your balance.

  • Working capital advances: With a working capital advance, you can quickly access cash to pay for everyday expenses and other business needs. You pay it back over 12 to 18 months.

Before choosing the option that’s right for you, make sure that you can afford the repayments and that it won’t cause more cash flow issues later on.

Working Capital Loan Requirements and Documentation

When applying, lenders will need to verify that you meet their working capital loan requirements. This is so they can make sure you can follow through on the repayments for the loan amount you take out.

Here are some of the eligibility requirements they may use to come to their approval decision.

1. Time in Business

Many lenders require you to have at least one year in operation.

This is because they need to see a track record of stability in business and money management before they commit to funding you.

2. Type of Business or Industry

Make sure the lenders you approach will service your type of business or industry.

For example, SBA loans won’t accept loan applications from firms engaged in certain industries, such as life insurance providers or pawn shops. Other lenders may have restrictions around financing for nonprofit organizations.

3. Financials

Lenders want to see that your business will have enough free cash to comfortably meet their repayment schedule.

To prove this, you might have to provide some or all of the following documentation:

  • Business plan: Show your lender exactly why you need the money and how you’ll spend the funds.

  • Financial statements: Copies of your bank statements and financial statements (e.g., annual revenue, operational expenses, tax returns, and so on) prove to lenders your business's financial stability.

  • Financial forecasts: Prepare your cash flow and profit and loss forecasts to illustrate you have a solid plan for generating cash flow and repaying your debt.

Even if the financial institutions you approach don’t ask you for any of the above, it’s a good idea to prepare them anyway so you can assure yourself that the decision to borrow money is the right one.

4. Creditworthiness

Your credit history and your firm’s credit history are important in any commercial loan application. Lenders generally want a personal credit score of 670 or more and a good track record of meeting financial obligations.

For your business credit score, financial institutions consider a score of 75 good (80 on Dun & Bradstreet’s system). If your lender uses the FICO Small Business Scoring Service, a score of 160 should be enough.

5. Collateral

Collateral is an asset belonging to your business that you offer to a lender to access a loan.

Collateral can include current assets like real estate, inventory, accounts receivables, and more. If you can’t meet the repayment terms on your loan, your lender will seize your collateral to recover the outstanding balance.

If you choose an unsecured loan, collateral won’t be required.

6. Personal Guarantee

A personal guarantee is another working capital loan requirement for many lenders.

With a personal guarantee, if you don’t make your monthly payments in full and on time, you become personally responsible for covering the outstanding balance.

It’s possible for a loan to have both a collateral and personal guarantee requirement.

How to Choose the Right Funding Option and Lender for Your Business

Research which lenders offer the financing you want. Many financial institutions place brief summaries of their working capital loan requirements on their websites so you can check to see if you qualify. Some also show the range of funding amounts they are prepared to offer.

If you're worried about your creditworthiness, consider applying for financing through online and alternative lenders or the SBA loan program. These lenders tend to have more favorable working capital loan requirements than traditional banks.

As a note of caution, think carefully before submitting multiple applications at once. Some borrowers will do this in the hunt for lower interest rates. However, the more applications you make for financing in a short space of time, the more it pushes your credit score down.

Improve Your Chances of Being Approved

Once you’ve found the type of working capital loan you want, there are two important steps you can take to make your proposal more attractive to lenders.

1. Compile Your Application Pack

Complete your business plan and compile your financial statements, making sure they’re up-to-date. By getting all your information and documents together, you’ll be better prepared to fill out your application form and provide any requested documentation.

This will ensure you’re giving the lender accurate information and can help to speed up the application process.

Also, it may be a good idea to have your unpaid invoices on hand so you can prove what money is due to come in during the next few weeks or months. This may provide your lender with extra reassurance.

2. Improve Your Credit Score

You can also try to improve your credit score before applying. Think about taking the following steps as long as it doesn’t compromise your cash flow.

First, make sure that you’re up to date on all your repayments. That includes any small business loans you may already be repaying as well as bills to suppliers. Suppliers who offer you credit terms often report back to credit bureaus on your payment history.

Second, settle any existing debts in full that you can afford to repay. That might only be a few hundred dollars on a business credit card. However, the more you can reduce debts, the more it shows a lender that you’re a responsible money manager.

Third, check your credit reports to make sure they’re accurate. CNBC reported that one in four reports contain errors. Request your personal and business records from each major bureau and request that they correct any mistakes.

Apply for Funding With Backd

Working capital loans can be an ideal way to manage business expenses when sales dip or clients delay paying their invoices. To secure one for your business, make sure you follow our tips so that your business complies with working capital loan requirements. 

Many loans offer flexible repayment options so you can clear the balance in full within a shorter time frame. Working capital financing can also be a form of fast funding. Many alternative and online lenders are set up to process your application quickly so you can access the money promptly.

Backd has two financing options available:

To be eligible for our lending solutions, you must be based in the U.S., have established business credit already, have a brick-and-mortar address, have a minimum credit score of 625, and have a minimum monthly revenue of $100,000.

Apply now and be funded as soon as the next business day.

What would you do with the right amount of capital?

Working Capital Advance

Easy payment structures offer amounts with fast turnaround, Simple and easy process to access working capital.

  • Flexible - no collateral required
  • $10K - $2M
  • Terms up to 16 months
  • Automatic daily or weekly, or semi-monthly payments

Business Line of Credit

Get instant access to revolving credit with unlimited terms, and the best rates for your business.

  • Draw funds anytime
  • $10K - $750K
  • Unlimited terms, incredible rates
  • Soft credit pull that doesn't affect your credit score