Working capital loans: size the gap, then match the product

On this page

• What working capital pays for
• Size the gap: a worked example
• A second way to size a recurring gap
• Match the product to the gap
• SBA rules that shape a working capital loan
• When a working capital loan is a bad idea
• Before you apply

What working capital pays for

Working capitalWorking capitalMoney for day-to-day costs such as payroll, rent and inventory. Full definition finances everyday operations and short-term needs: payroll, inventory, rent, software and the wait for customers to pay. SBA's rules describe it as financing everyday operations and short-term operational needs (SOP 50 10 8.1, Sec. A, Ch. 3, Para. A.2.d).

A working capital loan is a use, not a type of lender. A line of creditline of creditA credit limit you can draw on, repay and draw on again. , a term loan or an SBA loan can each serve as one.

It is the most common reason firms seek financing. In the Federal Reserve Banks' 2026 survey, 56% of applicants sought it to meet operating expenses. Pursuing an expansion or new opportunity came next, at 46%. The survey is a convenience sample, so read these as a pattern.

Size the gap: a worked example

Suppose you win a $120,000 job. It costs $84,000 to deliver, and the customer pays after you finish. You have $24,000 set aside for it. This is an illustration.

• Cost to deliver: $84,000.
• Cash you can commit: $24,000.
• Gap: $84,000 − $24,000 = $60,000.
• Profit if all goes well: $120,000 − $84,000 = $36,000.

Now price two ways to cover the $60,000 gap.

• Line of credit. Assume 12% a year, drawn for four months: $60,000 × 12% × 4/12 = $2,400. That is 6.7% of the profit.
• Merchant cash advance. Assume a 1.30 factor: $60,000 × 30% = $18,000. That is 50% of the profit.

Price the capital against the profit it creates. When the cost takes half the profit, you are working for the lender. Add a cushion for late payment and cost overruns before you settle on an amount.

A second way to size a recurring gap

For a gap that repeats, count the days your cash is tied up. Suppose customers pay in 45 days, inventory sits for 30 days, and you pay suppliers in 20 days.

• Days your cash is tied up: 45 + 30 − 20 = 55.
• Monthly operating costs: $60,000, or $2,000 a day over 30 days.
• Working capital to carry: 55 × $2,000 = $110,000.

Cut the 45 days to 30 and the figure falls to 40 × $2,000 = $80,000. Collecting faster shrinks the need as surely as borrowing more covers it. Treat the result as a rough size, then check it against your actual bank balances through the year.

Match the product to the gap

• Customers pay slowly. A line of credit or an invoice-based line fits. SBA's Working Capital CAPLine lends against receivables and inventory, up to $5,000,000 (SOP 50 10 8.1, Sec. B, Ch. 4).
• A seasonal peak. Borrow when you build inventory and repay from sales. SBA's Seasonal CAPLine is built for this (Sec. B, Ch. 4).
• A one-time growth step. A term loan sized to the payback period fits. SBA allows up to 10 years for working capital, and a 7(a) loan can reach $5,000,000.
• An ongoing shortfall. If costs exceed revenue month after month, a loan only adds a payment. Fix the margin first.

Two more SBA lines are worth knowing. SBA Express lines reach $500,000 (Sec. B, Ch. 2, Para. B.1). The 7(a) Working Capital Pilot offers lines up to $5,000,000 and runs August 1, 2024 through July 31, 2027 (89 FR 57353).

SBA rules that shape a working capital loan

• No debt payoff. Working capital proceeds may not refinance existing debt. A payoff must qualify on its own under Appendix 14 (Sec. A, Ch. 3, Para. A.2.d.iii). Contract, Seasonal and Builders CAPLines cannot refinance existing debt; Working Capital CAPLines may refinance only short-term revolving debt (App. 14, Para. B.4-5).
• No trust taxes. SBA bars using proceeds for past-due payroll or sales taxes held in trust (Sec. A, Ch. 3, Para. B.6).
• Collateral. SBA Express needs none at $50,000 or less (App. 19, Para. B.3). On a 7(a) Small loan above $50,000 that is half or more working capital, expect a lien on the business's fixed assets (App. 19, Para. B.2).
• Guarantee. Each owner of 20% or more of the business gives an unlimited personal guaranty (Sec. A, Ch. 5, Para. A.1).
• Cost. The 7(a) variable-rate cap is Prime plus 3.0 to 6.5 percentage points, depending on loan size (13 CFR 120.214(d)).

A lender applies its own credit policy on top of SBA's rules, so be ready to show how much you need and why.

When a working capital loan is a bad idea

• To cover losses. Borrowing delays the problem and adds interest.
• For a permanent shortfall. If you borrow the same amount every month, the gap is structural. Raise prices, cut costs or collect faster before you add debt.
• For long-lived assets. Working capital terms are short or revolving. Paying for equipment or property with them mismatches the term.
• To pay off old debt. SBA bars it on the working capital portion of a loan. Use a refinance that qualifies.
• Without a repayment source. Name the invoices or sales that will repay the loan, and the month.
• When the cost eats the profit. Run the profit test above. If the cost takes a large share, find cheaper money or skip the job.
• When coverage is thin. Lenders test whether cash flow covers the payments. A Standard 7(a) loan needs coverage of at least 1.15:1 (Sec. B, Ch. 1, Para. C).

Before you apply

Write down four things:

• The amount, and the arithmetic behind it.
• What each dollar pays for.
• The sale or payment that repays it.
• The month each draw returns.

Bring recent bank statements and a current list of what you owe, since lenders review both.

Then ask each lender:

• What is the total cost in dollars for the period I will borrow?
• Can I repay early without a fee?
• Which reports do you require, and how often?
• Is the amount committed, or can you reduce it?
• What do I pledge, and do I guarantee personally?