Working Capital Loans for Small Business

Working capital is the lubricant that keeps the wheels of your business turning. And even big businesses with large client bases can experience a shortage of working capital when clients are late to pay invoices or sudden unexpected expenses rear their head.

That’s where working capital loans come into the picture. These loans serve as a form of bridging finance, allowing you to cover your day-to-day operating costs while waiting for your cashflow to stabilize.

This article will provide more information on what working capital loans are and how you can use them to ensure smooth, day-day-day operations for your business.

24% of SA businesses experienced cash flow issues in 2024

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What is a Working Capital Loan?

A working capital loan is a loan designed to provide you with liquidity to continue short term business operations when your cashflow doesn’t cover your operational expenses. Working capital loans are typically short term loans which are designed to be granted and paid off over short periods of time.

A typically use case would be taking out a working capital loan to cover payroll costs in the event that one or more clients are late to pay their invoices. In this situation a working capital loan allows you to continue your business operations without unnecessary stress to yourself and employees, and settle your loan amount as soon as your invoices are paid.

Working capital loans differ from other business loan products in a couple of important ways:

1. Loans are typically short term – this reduces the impact of interest charges and reflects that these loans are intended to cover short term interruptions in cashflow.
2. Working capital loans are meant to cover existing operating expenses, rather than additional purchases like new equipment or purchasing other businesses. Large purchases are better serviced with long term loans with lower interest rates and extended repayment periods.

Working capital loans usually come in two forms, unsecured and secured loans.

Secured working capital loans will usually require giving the lender control over an asset in return for the loan. The asset will be returned once the loan is settled. 

An example would be a courier company giving a lender a delivery bakkie as loan collateral while the loan is being paid off. This type of loan is suited to companies or individuals with poor credit scores, or who fail to meet the requirements for unsecured loans despite being asset rich.

Unsecured working capital loans do not require an asset as security against the loan. Instead these loans are granted on the basis of credit score and business turnover. These are favoured by established businesses with sound financial records who do not want to risk their business operations by putting business assets up as loan collateral.

Benefits of Working Capital Loans

Working capital loans can be a valuable tool for business continuity, particularly small businesses without cash reserves large enough to bridge cashflow interruptions.

Common situations where working capital loans are required include:

• covering payroll costs
• covering operational expenses such as equipment, facility rental or supplier invoices
• purchasing inventory
• bridging seasonal revenue shortfalls.

SME working capital loans can be critical to the sustainability of small to medium enterprises, particularly when in a growth phase. 

During these periods businesses are less likely to have access to cash reserves that will keep them operational when cashflow dries up. In the absence of these cash reserves, viable businesses without access to working capital can easily be forced to shut down due to otherwise temporary decreases in cashflow.

In fact, academics at WITS University took a deep dive into the importance of working capital loans for healthcare businesses and found that they significantly enhance sustainability, enabling private healthcare practices in Gauteng to cover operational costs, manage debt, and achieve long-term success.

Comparing Working Capital Lenders

Feature	🏦 Traditional Banks	💻 Alternative Lenders (Online, Fintech)	🏛️ Govt / Development Funders (e.g., DFI, IDC, SEFA)
Interest Rates	10-20% p.a. (prime-linked)	25–50% p.a. (risk-based)	4–10% p.a. (often subsidized)
Loan Terms	1–5 years	3–12 months	1–10+ years
Loan Amount Range	R100k – R10m+	R20k – R5m	R50k – R50m+
Collateral	Often required	Sometimes required (depends on lender)	May require collateral or equity contribution
Approval Time	3–8 weeks	1–5 days	2–12+ weeks
Documentation	Extensive: financials, bank statements, tax	Light: 3–12 months’ statements, ID, CIPC	Extensive: business plan, projections, B-BBEE, etc.
Credit Score Requirement	High (650+)	Flexible / varies (600–650+)	Varies, but often includes non-financial assessment
Use Cases	Long-term capital, asset financing	Working capital, quick access	Startup/growth funding, social/developmental impact
Best For	Mature businesses with strong credit	SMEs needing fast, flexible access	Early-stage or underserved businesses
Processing Complexity	High	Low to Medium	High
Pros	– Low interest rates – Large loan amounts – Reputable institutions	– Fast approval – Easier application – Flexible requirements	– Low/subsidized interest – Support for startups & underserved SMEs
Cons	– Slow processing – Strict criteria – High documentation burden	– Higher rates – Shorter repayment terms – Smaller loan sizes	– Long processing – Heavy paperwork – Funding tied to specific sectors

Best Options by Scenario

Business Need / Profile	Best Lender Type	Why
Quick cash flow relief	💻 Alternative Lenders	Fast processing, low doc requirements
Large working capital (R6m+)	🏦 Traditional Banks or 🏛️ Dev. Funders	Larger loan capacity and long-term repayment
New business/startup (less than 1 yrs)	🏛️ Govt / Development Funders	Leniency on credit score, development-focused mandates
Black-owned SME (South Africa)	🏛️ SEFA, NEF, IDC, etc.	Tailored funding programs, often B-BBEE aligned
Tech startup with low assets	💻 Alt. Lender	Flexible on collateral, quick capital
Stable business with good credit	🏦 Traditional Bank or 💻 Alt. Lender	High trust, scalable funding

How Working Capital Loans Work

How working capital loans work will depend on the type of loan you take out.

For asset based loans the loan will typically follow the process below:

• The lender will request a valuation of the asset that will be used as security against your loan. There will typically be minimal paperwork required beyond a title deed to the asset being used as loan collateral and proof of identity and residence. Credit checks are rare for this type of loan.
• If the asset is approved as collateral for the loan a loan amount will be offered to you for acceptance.
• Typically the lender will not require you to disclose the reason for the loan.
• Upon acceptance the lender will take temporary ownership of the asset for the duration of the loan.
• Once the loan is settled and all associated fees and interest costs are paid, ownership of the asset will be returned to you.
• Interest rates in this market can vary significantly, but you can expect anywhere from 25% to 50% annual interest on the total loan amount. Note that these loans are paid off over short periods, so the actual interest paid will usually be significantly less than the quoted interest over 12 months.
• Loan repayments can be structured to be weekly or monthly. More frequent payments reduce the outstanding loan account more rapidly and therefore result in overall lower interest payments on the loan.

Unsecured business loans have more rigorous application requirements due to the higher level of trust required to grant these loans. The process below is typical when applying for an unsecured business loan.

• An application must be submitted. Requirements typically include business bank statements recording at least 3 months of transactions, proof of business registration with the CIPC, tax number, proof of identity and proof of residence. Lenders will usually conduct a credit check on the person applying for the loan.
• The lender will then review the loan application. Independent lenders tend to process loans rapidly, granting feedback on the loan within 1 to 5 business days. Banks may take significantly longer.
• Lenders may review the reasons for requesting the loan, as this can provide signals about your business’s viability and status.
• Upon acceptance of the loan agreement the agreed amount will be disbursed into the applicant’s bank account.
• Interest rates in this market are variable depending on the type of lending institution, with rates between 10% and 50% the norm. Loan duration can be up to 12 months on these loans, so for longer term loans negotiating a lower interest rate can be critical.
• Loan repayments can be structured weekly or monthly, with weekly payments resulting in overall lower interest payments.
• Many unsecured business loans can be redrawn once settled, acting as a revolving credit account for businesses who require this service from a lender.
• The loan amount can usually be settled over the repayment period, or settled early. Whether penalties for early settlement apply will depend on the lender.

Unsecured Business Loan Example

A farmer approaches a lender for a R800,000 loan to cover operational expenses while waiting for a major retailer to cover his invoices for produce delivered. As the payments are delayed due to an accounting glitch on the retailer’s end he decides to apply for a 3 month repayment period.

The loan is granted with 3 payments required for settlement:

1. A first payment of R302,666
2. A payment of R282,666
3. A final payment of R282,666

The total cost of the loan if paid over 3 months therefore comes to R868,000, with interest coming to R68,000.

Payment #	Due Date (Month)	Payment Amount	Principal	Interest (Estimated)	Outstanding Balance
1	End of Month 1	R302,666	R266,666	R36,000	R533,334
2	End of Month 2	R282,666	R266,666	R16,000	R266,668
3	End of Month 3	R282,666	R266,668	R15,999	R0
Total		R868,000	R800,000	R68,000

Risks & Considerations

As with any loan, taking out a working capital loan carries risks in the event of default. 

Asset based working capital loans are easiest to understand – defaulting on the loan will typically result in the loss of the asset used as loan security. This is unless you are able to negotiate an agreement with the lender in the event of default. 

The asset lost will typically carry a much higher value than the loan value. This means asset based loans should only be used for working capital loans if normal cashflow is expected to resume within the loan period. If this is not the case you will get more value out of your asset by selling it to cover your operational expenses, with no pressure to meet repayment targets.

Defaulting on an unsecured business loan will typically have an impact on your credit score and the willingness of other lenders to consider your loan applications moving forward. 

Furthermore you are at increased risk of legal action by the lender if they attempt to recover their costs. This means you should not resort to an unsecured working capital loan unless you expect your cashflow to normalize during the loan period.

For both types of loans it is critical to take into account that you will be required to meet weekly or monthly loan repayment requirements during the loan period – in many cases this will mean funding part of the repayment from the loan capital. If your cashflow does not improve during the loan period, you can still find yourself unable to meet operational expenses as you cover the loan repayments.

On the plus side, interest repayments on business loans may be considered tax deductible business expenses. This will effectively reduce the cost of credit to your business by reducing the tax paid on your annual profits.

Working Capital Loans from Prospa

If you need access to working capital, apply through Prospa. As business loan brokers we are able to connect you to the right lender for your specific business needs. Get up to 5 million in unsecured business funding within as little as 24 hours.

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