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What is a working capital loan used for?
A working capital loan covers day-to-day costs such as payroll, rent, inventory and supplier bills while you wait for customers to pay. In Canada, working capital through lendflo ranges from $5K to $250K, with decisions in about a day and funding quickly.
A working capital loan bridges the gap between payables and receivables so you never miss payroll, a supplier deadline, or a growth opportunity. It is one of the most common reasons Canadian small businesses borrow, and one of the easiest to misuse. Here is how it works.
What working capital actually is
Working capital is the money you use to run the business day to day. The simple version is current assets minus current liabilities: what you have in cash, receivables and stock, less what you owe in the near term. When that number is too small, even a profitable business can stall.
Signs you may need working capital
- Customers pay in 30 to 60 days but your bills are due sooner
- You need to buy inventory ahead of a busy season
- A large order requires up-front spending
- Revenue dipped and you need a bridge to recover
How lenders assess it
Working capital is based mainly on recent revenue rather than collateral. Most lenders look for six or more months in business and around $10,000 a month in deposits, and they consider credit scores from 500. That makes it one of the more accessible products for a growing business, though the cost reflects the speed and flexibility.
What it is for, and what it is not
Working capital works best for short-term, self-liquidating needs: stock you will sell, payroll you will cover from an incoming invoice, a supplier deposit on an order that is already confirmed. It is a poor fit for long-lived purchases such as machinery or renovations, which are better matched with equipment financing or a longer term loan.
Keeping the cost under control
Borrow only what you can cover from expected revenue, and compare the total amount you will repay across offers. Short repayment terms keep the overall cost down but raise each payment, so match the schedule to your cash flow.
- Ask for the total repayment amount in dollars, not only a rate
- Check whether there is a penalty or a saving for repaying early
- Make sure the payment frequency (daily, weekly, monthly) suits how your cash arrives
- Borrow for a specific purpose and write down how it will be repaid
Line of credit or loan?
If your need repeats, such as a gap every month, a revolving line of credit may fit better because you only pay for what you use. If it is a one-time bridge, a short working capital loan with a defined end date keeps things simple.
