Working Capital Loans Bad Credit

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Cash flow may be king, but what do you do when cash flow is compromised and you have a low credit score?

There’s nothing quite like needing working capital, but not being considered by the big banks because of your credit score. But why is working capital so important in the first place?

What Is Working Capital?

Your working capital is your company’s ability to pay off its current liabilities with its current assets. Imagine all your expenses and debts added up, then imagine all of the capital that you now have that you could use to pay for those expenses. Simply put, the difference between the two is your working capital.

(Working Capital = Current Assets – Current Liabilities)

There are two sides to your working capital, your assets, and your liabilities.


This is what your company owns. Assets can be tangible or intangible, but an asset is something you could easily turn into spending money within one financial year or business cycle.

The more obvious kinds of assets include:

  • Money in your bank accounts
  • Liquid securities such as bonds and stocks
  • Accounts receivable
  • Cash
  • Any cash equivalents

Assets can also include inventory and interest payable. You must keep in mind that long-term and illiquid investments such as real estate or collectibles don’t count as a part of your current assets.


Your liabilities include all the debts and expenses that your company will have to pay for in one financial year or business cycle. This includes all your base expenses, such as:

  • Rent
  • Supplies
  • Utilities
  • Accounts payable
  • Accrued liabilities
  • Accrued income taxes
  • Dividends payable

Your long-term debts and leases aren’t considered a part of your current liabilities. However, long-term loans that will be due within the current financial year must be included in your current liabilities.

Some Uses For Working Capital Loans:

  • Rent
  • Payroll
  • Utilities
  • Accounts payable
  • Loan payments
  • Repairs
  • Updates
  • Inventory purchases
  • General cash flow

Working Capital Matters

Working capital is a critical metric, as it provides a good insight into your company’s financial health. Creditors can use your working capital as an indicator of your company’s ability to pay off its debts. Your working capital is indeed one of the most brutal, straight-to-the-point metrics you can come up with for a small business. If you are having problems maintaining your working capital, your business can be described as “unstable,” at best.

So, working capital is critical, but what if something goes wrong and you don’t have access to working capital? Well, the first thing you should do in such a situation is borrow the money you need so you can continue operating your business.

Unfortunately, access to business financing can be a serious challenge. While business financing options are critical, most banks won’t want to deal with borrowers that don’t meet their strict criteria. The banks will want to see a business that serves as a pinnacle of stability in the modern economy to feel comfortable handing a loan out. They’ll want to see very high revenues, high credit scores, and an absence of delinquencies on previous debts in many cases.

If you’re worried about your current credit score, your concerns are completely justified…

How Does Bad Credit Affect Access To Working Capital Loans?

As is the case with all lending options, a bad credit score will harm your ability to get a working capital loan.

Bad credit can be a serious hindrance to your ability to secure any business financing. This is more true at some institutions than others. For example, a bank will hold your bad credit score against you more mercilessly than online lenders. In either case, the lenders who will deal with you and the terms they’ll give you will be directly affected by your credit score.

For most lenders, a “bad” or worse credit score starts at just below 600. If you don’t meet the threshold, many banks will simply refuse to discuss working capital loans with you. To make matters worse, potential lenders will scrutinize your business more if your credit score is too low. Your credit score may serve as a baseline, but it’s not the only thing lenders will want to look at. It’s always best if you can highlight the best of what you bring to the table when you’re speaking with a potential lender.

What Do Business Lenders Look At?


Business lenders will want to look at your gross revenue. Typically, starting points for working capital loan eligibility start at either $5,000 or $10,000 per month. Your gross revenue generally determines the loan amount you can be approved for.

Debt-income ratio

Lenders will want to know and understand your ability to pay back your debts. To do this, they’ll compare your income with your outstanding debts.

Your Time In Business

This is something that almost every business lender will ask. If you want the best business loans on the market, you’ll be expected to have been in business for at least five years. For many online lenders and younger financial institutions, they’ll just demand that you’ve been in business for 3-6 months.

Cash Flow

Business lenders will typically have a look at your bank statements as a part of their process.

Personal Guarantees or Collateral

Many lenders, especially big banks, will regularly demand that borrowers provide collateral. In some other cases, a personal guarantee will be satisfactory. Collateral must often be provided in the form of valuable, tangible assets such as real estate or vehicles. In many cases, business owners can use their own inventory as collateral, especially when it comes to invoice financing options.

Your Options

If you have a low credit score but want to get a working capital loan, you have several options. First of all, you’ll want to deal with more pressing concerns. Try talking to your suppliers and coming up with alternative arrangements to reduce your immediate expenses. Try to negotiate installment payments with them. In the meantime, you’ll need to start looking for other options.

The easiest place to start your search is with lenders that don’t require the high credit scores that banks do. You can also resort to other business lending options, such as invoice financing or business lines of credit.

As for your search for working capital loans, you’ll have to be more intentional in your search. You can look for online lenders as well as brick-and-mortar institutions, including credit unions.

Online Lenders

If your credit score is quite low, the most feasible place to look for working capital financing is online. The rise of online lenders has created many new options for small businesses that don’t meet the revenue and/or credit score requirements of the banks.

When it comes to online lenders, you’re dealing with a real mixed bag. There are plenty of fair options for individuals with low credit scores. On the other hand, there are plenty of terrible lenders with ridiculous APRs that like to trap people in a predatory debt cycle.

If you look for working capital loans online, just make sure you understand the agreement you’re signing up for. Pay attention to application fees and prepayment fees. Pay even closer attention to the APR on any loan you’re looking at. When people get into inescapable debt cycles, it’s typically the high APRs that keep them stuck there until they declare bankruptcy.

Other Private Lenders

Private lenders generally offer far less stringent terms than banks. This is because private lenders work for groups of investors who are willing to take more risks. Because of this, they’re typically more willing to provide a loan, even for individuals with bad credit.

Similar Alternatives

It is often better to select an alternative business financing method that will serve the same purpose you want a working capital loan for.

Business Line of Credit

A line of credit is a borrowing option that provides the borrower with a lot of freedom. A line of credit is a “pool” of money that you can draw from on an as-needed basis.

When you apply for a business line of credit, you’ll go through the same kinds of checks you’d have to go through for other business financing options. Your total draw limit will be determined by factors like your credit score and gross revenue.

When you have a line of credit, you can continue drawing funds until you’ve reached your draw limit. When you draw funds, you must pay a minimum each month and pay any interest you accrue until you’ve paid off the loan. In many cases, you don’t need to pay for a business line of credit at all until you draw funds!

A business line of credit is useful for ongoing expenses or for sudden purchases that you can’t immediately afford.

This financing option can replace a working capital loan for:

  • Payroll
  • Sudden repairs or software updates
  • Cash flow
  • Random expenses

Invoice Factoring

Invoice factoring is a great middle-ground for some business owners. Invoice factoring involves you selling your accounts receivable (invoices) to a third-party factoring company at a discount. The factoring company then pays you back a portion of what’s owed to you.

Business owners sometimes factor receivable assets to meet immediate financial needs or mitigate their credit risk.

This financing option can replace a working capital loan for:

  • Immediate cash needs
  • Coming up with payroll

Merchant Cash Advances

Merchant cash advances are upfront loans that are given to you in exchange for a portion of your future sales. You can use merchant cash advances to borrow a large sum of cash, which will net you a percentage of your future credit and debit sales. However, be warned that merchant cash advances often come with high APRs.

This financing option can replace a working capital loan for:

  • Fast access to funds
  • Immediate cash needs
  • Sudden repairs or updates

Business Term Loans

This business financing option will have you simply take out a term loan. A term loan will be sent to you in a single transaction. You’ll then pay back the loan according to the conditions you and your lender agree to.

Term loans typically last anywhere from a few months to a couple of years. They are also easier to get than working capital loans in most cases. Because of the way business term loans are set up, they are more useful for one-off, large purchases

This financing option can replace a working capital loan for:

  • New work vehicles
  • Software updates
  • Hardware updates
  • Renovations
  • Large-scale investments into your business

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The Last Word

A working capital loan is a great tool for any business owner. Unfortunately, the world of business is brutal and access to good financing options is often limited to the biggest players.

Fortunately, there are financing options that will allow you to gain a working capital loan. Even in cases where finding a working capital loan is too burdensome for you, you can resort to similar financing options that will get the job done.