Staying Afloat with Working Capital Loans

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Working Capital Loans Canada - Smarter Loans

Working Capital Business Loans in Canada

Working capital loans are used to finance the daily operation of a business. They are not designed to buy long-term assets or to make investments. As such, the proceeds from a working capital loan can be the “bread and butter” of the business that keeps it functioning while the business experiences growth.

Although banks have traditionally offered the lowest rates for working capital loans, times have dictated that many business need alternative financing to maintain capital for everyday business expenditures.


The following information will provide an insight into the best uses and options for working capital loans:

  1. Uses for working capital loans
  2. The way working capital loans work
  3. Invoice financing
  4. Accounts receivable working capital loans
  5. The good and the bad of working capital loans


Uses for Working Capital Loans

The first option a business owner can turn to before trying alternative financing is a bank, because banks offer lower interest rates. The majority of banks are willing to offer low financing for a working capital long, as long as the borrower as an established business that has a strong work flow. Of course, other considerations, such as credit history will factor into the approval.

It is expected that the business owner has a plan in place for how the proceeds will be used before applying. Most commonly, working capital loans are used for the following purposes:

  • Payroll
  • Debt payments
  • Rent
  • Riding out seasonal revenue dips
  • Maintenance
  • Inventory management

Working capital loans are designed for immediate needs, never for long-term investments like real estate or business acquisition.


The Way Working Capital Loans Work

The process that the lender uses to decide if a business qualifies for a working capital loan is by subtracting the business’s current liabilities from their current assets. The amount that is left over is what is considered the amount the business has to work with. It is this amount that is borrowed against if the lender approves the loan.

Lenders consider some of the following criteria when deciding to approve a working capital loan:

  • What the average sales are for the year and/or month
  • The length of time the owner has been in business
  • Whether the immediate business forecast indicates the borrower will be able to repay the loan

If the application for a working capital loan is approved, the borrower has to contract for specific terms of repayment, which vary by lender. Often, repayment is based upon a daily sales percentage, in addition to interest. As an example, a business with daily sales of $100, who agrees to pay 10 percent of daily sales plus $1 in interest will pay $11 each day. Most working capital loans also come with fees which must also be paid in addition to monthly payment and interest.


Invoice Financing

Sometimes a business needs a loan to cover gaps in its cash flow caused by customers who pay their invoices late. A type of working capital loan to assist with this situation is called invoice financing. The way it works is that the lender finances the amount of all of the outstanding invoices, which they collect upon once the customer pays. The downside to this financing is that the interest rate is quite high, although it has been a lifesaver for many businesses.


Accounts Receivable Working Capital Loans

Working capital loans can also be offered based upon the value of confirmed sales orders of the business. Companies use this type of loan very often to fulfill confirmed sales contracts or orders. An accounts receivable working capital loan is not available for new businesses without a proven track record. Lenders offer account receivable loans to proven reputable companies with good credit and a reputation for fulfilling business obligations.


The Good and the Bad of Working Capital Loans

Working capital loans are a financial product with advantages and disadvantages which should be considered prior to apply for a loan. Advantages of working capital loans include:


  • Unlike dealing with an equity investor, business owners keep ownership in their company.
  • The loan allows the business to be prepared for any financial problem which may arise. Emergencies and other issues are covered without causing a financial crisis for the business.
  • Unsecured loans are available. Working capital loans can be both secured and unsecured, which means the business owner does not have to put up collateral.
  • The proceeds from capital loans can be used for whatever is needed., unlike other loans, such as equipment loans, that are approved for a specific purpose.
  • The time for a credit decision for a working capital loan is much shorter than the time it takes to get approval for a business loan from a bank.


Among the disadvantages of working capital loans are:


  • Depending on the lender and the borrower’s credit rating, collateral may be required for security. There could be a chance of having to use personal assets, like a home, for collateral for the loan.
  • Unsecured working capital loans come with higher interest rates because they pose a bigger risk for the lender. Also, having bad credit may result in a denial of an unsecured working credit capital loan.
  • There is a financial obligation to the lender to repay the loan-even if the business fails. Therefore, the loan must be repaid even if the business owner files bankruptcy, since these lenders will have a claim to their money before equity investors.
  • The credit rating of the business may be impacted if short term loans are taken out each time the business needs to get over a slump. Eventually, the credit score is lowered and will have to pay higher interest rates going forward, as well as other adverse consequences.


In summary, a working capital loan, like other types of business credit, is a necessary product for business owners. They are very useful in preventing interruption of daily business operations. Working capital loans come in a wide variety of shapes and sizes, this flexibility allows business owners many financial choices to find the one that makes the most business sense to their company’s unique circumstances.

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Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.