Written byA working capital loan is short-term business finance that funds day-to-day operations, such as payroll, stock and supplier bills, rather than long-term capital purchases.
Also known as: working capital finance, short-term business loan
Key points
- Working capital finance takes several forms: a single advance with a set repayment date, a revolving line of credit, an overdraft or invoice finance.
- A merchant cash advance is often grouped with these, but it is technically a purchase of future card takings rather than a loan.
- Unlike a term loan, it targets liquidity over a short tenure rather than funding a capital project over years.
- Unlike equity, it does not dilute ownership, but it does carry interest and fees.
- Short-term money is usually dearer than long-term debt, and repeated rollovers add cost and signal cash flow strain to lenders.
How a working capital loan works
The structures differ but the job is the same: turn expected income into cash you can use now. Repayment is either a fixed term, often 30 to 180 days, or revolving, where you draw, repay and redraw up to an approved limit. Funds come as a lump sum or through multiple draws.
Some facilities are secured against property, equipment or other assets registered on the PPSR; others rely on cash flow and credit history. Factoring and invoice discounting instead advance against receivables. Many short-term loans can be rolled over, so check what a rollover costs before you need one.
What it costs
Cost usually comes in layers: interest quoted as an annual rate, fixed or variable; a one-off establishment or arrangement fee at drawdown; ongoing line or account-keeping fees; sometimes an early repayment or exit fee. Invoice finance adds a factor fee charged as a percentage of the invoice value on top of interest on the advance.
Annualised rate comparisons can mislead on short-term facilities, because a fixed fee is proportionally much larger over 90 days than over five years. Ask each lender for the total cost over the term you actually intend to use, and for a schedule showing interest and fees separately.
Eligibility and when to use it
Lenders commonly look for a minimum time in business, often six to 12 months, a turnover level that varies by lender, consistent inflows that show you can service the debt, and clean business and director credit checks. Expect to supply ABN or ACN details, recent financial statements, BAS, several months of bank statements, director identification, a debtor ageing report for invoice finance, and a short cash flow forecast.
Typical triggers are a seasonal stock build before a busy period, a payroll gap while waiting on customer payments, a one-off supplier order that wins a sale, or a BAS liability landing before receipts do. Match the structure to the gap: small recurring gaps suit an overdraft, an unpaid invoice problem suits invoice finance.
Example
A retailer needs $50,000 to buy seasonal stock and expects sales to clear it within 90 days. It takes a 90 day loan with an establishment fee charged at drawdown, plus interest for the 90 days it is drawn. The stock supports around $80,000 of sales in the season, and the margin on those sales comfortably covers the cost of the finance. Because the loan is repaid from the sales it funded, the business avoids rolling it over.
Not to be confused with
Frequently asked questions
What is the difference between a working capital loan and a business term loan?
A working capital loan is short-term and solves a liquidity gap: payroll, stock, a supplier bill, a tax liability. A term loan funds a longer-term investment such as a fitout or a major asset, and is repaid over years. The tenure and the purpose are what separate them.
How quickly can I get a working capital loan?
It depends on the structure and how ready your paperwork is. An overdraft or invoice finance facility with an existing banking relationship tends to move fastest, while short-term lenders take longer to assess. Incomplete documents and an unclear cash flow forecast are the usual causes of delay.
Do I need to provide collateral?
Not always. Some facilities are unsecured and priced on cash flow and credit history. Others take security over property, equipment or assets registered on the PPSR. Invoice finance is secured by the receivables themselves, so the invoices do the work that property would otherwise do.
Are interest payments tax deductible?
Interest on a business loan is generally deductible where the borrowed funds are used to produce assessable income. GST treatment of finance fees can vary. Check the ATO guidance or speak with your accountant about your own circumstances before you rely on a deduction.
Can a working capital loan be rolled over?
Many short-term facilities can be rolled over, but each rollover costs money and the fees stack up. Rolling repeatedly also tells a lender that the underlying cash flow problem has not been solved, which can affect future applications. Treat rollover as a fallback, not a plan.
Related terms
Broader term: Working capital
Working capital
Working capital is the difference between a business's current assets and current liabilities: the measure of whether it has enough liquid resources to meet obligations due within 12 months.
Read definitionTerm loan
A term loan is a lump sum advanced up front and repaid in scheduled instalments of principal and interest over a set term.
Read definitionLine of credit
A line of credit is a revolving credit facility with an approved limit that you can draw, repay and redraw, paying interest only on the drawn balance.
Read definitionOverdraft
An overdraft is a short-term credit facility attached to a transaction account that lets you spend past your available balance up to an agreed limit.
Read definitionInvoice discounting
Invoice discounting is a working capital facility where a lender advances most of an unpaid invoice's value and holds a reserve until your customer pays.
Read definitionFactoring
Factoring is a finance arrangement where a business sells or assigns its unpaid invoices to a specialist lender, the factor, for an immediate cash advance and outsourced collections.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.