5 Top Options for Working Capital Financing

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Problems can arise if you run out of cash, even if you know there will be plenty coming in soon. Different types of credit can help small businesses bridge temporary shortfalls in working capital, or the money you have on hand for necessary day-to-day expenses.

What is working capital financing?

Working capital financing is a type of financing used to pay for everyday business expenses, such as payroll, inventory, supplies, and even repayment of other financing. The extra funds can be especially helpful during an emergency, a slowdown, or when you have upfront costs for a new project or order.

Six types of working capital financing

  1. Short-term loans
  2. Business lines of credit
  3. Business credit cards
  4. SBA loans
  5. Invoice factoring and financing
  6. Merchant cash advances

You have many options when it comes to accessing funding for working capital. If you need the funds quickly, you could turn to an online lender or other alternative sources of financing. Traditional lenders also offer business loans and lines of credit you can use for working capital, but they may have more stringent requirements and a longer approval process.

Understanding the differences between small business financing options can align your borrowing with your needs. Here’s a basic introduction to common options.

1. Short-term loans

Short-term business loans are generally installment loans that you repay within six to 24 months. Many short-term loans are unsecured, meaning no collateral is needed, and lenders may consider your personal and business credit and the business’s finances to determine your loan terms. If you don’t have good credit or steady revenue, your personal or business assets may be used as collateral for a secured short-term loan.

2. Business lines of credit

Business lines of credit give you the option of borrowing up to a maximum credit limit, and with a revolving line of credit you can repeatedly pay down your balance and borrow against your credit line. You’ll only pay interest if and when you borrow, which can make this a flexible way to have access to financing. However, some credit lines may have other fees, such as an annual or inactivity fee, and there may be minimum requirements for each loan.

3. Business credit cards

Small business credit cards work like consumer credit cards, but may offer business-specific benefits or features, such as rewards on common business purchases and employee cards. Although credit cards often have high interest rates, they can be a good option for short-term financing. If you pay your balance outstanding in full each month, it means you can borrow money without paying any interest. 

4. SBA loans

The US Small Business Administration (SBA) helps run various loan programs for small businesses. Most SBA loans are made by private lenders, who receive an SBA guarantee of repayment if the borrower defaults, thus reducing risk to the lender. Although the SBA loan requirements and application process can be rigorous, you may receive more favorable terms because of the SBA guarantee. The 7(a) loan program is the most popular, and it offers up to $5 million in funding that you can use for your short- and long-term working capital needs. There are also SBA revolving lines of credit that you can use for specific purposes, such as working capital during an offseason.

5. Invoice factoring and financing

If you’re waiting on customers to pay invoices, you can get immediate access to part of the funds by factoring or financing your invoices. With invoice factoring, the factoring company buys your invoices and fronts you a portion of the payment. Your customer then sends payment to the factoring company, which gives you the rest of the amount, minus its fee. Invoice financing works similarly, but you take out a loan against your invoices rather than selling them.

6. Merchant cash advances

Merchant cash advances (MCAs) aren’t technically a type of loan, but some businesses use them if they need working capital. With an MCA, you can quickly get cash by selling a portion of your future sales. Often, the company purchasing your future sales will automatically collect a portion of your daily or weekly debit and credit card sales, or a fixed payment every day or week. A MCA can be quick and easy to get, but the frequent payments can eat into your cash flow.

What are the benefits of working capital financing

You can use the proceeds of working capital financing for almost anything, but you’ll often benefit most if you have a specific plan for using the money. Companies that benefit from obtaining working capital financing might use the money to:

  • Keep a seasonal business afloat during its off season
  • Quickly get funds to pay for an emergency expense
  • Buy supplies or inventory ahead of a busy season
  • Hire employees or consultants for a new project

Although working capital financing might offer you quick and easy access to short-term business financing, take time to understand the offer’s terms. The money might help you temporarily, but high fees or interest rates could make managing your cash flow difficult if you haven’t planned ahead, and you might find yourself in a debt spiral—seeking new financing to pay off previous debts.

Five popular options for working capital financing

  1. Shopify Capital
  2. BlueVine
  3. FundBos
  4. OnDeck
  5. SBA loans

Many small businesses turn to nontraditional sources of funding for working capital loans or other types of business financing because they can offer simple applications and fast approval times. Additionally, look into small-business financing from local banks and credit unions, which may offer better terms, even if the process can be slightly more cumbersome. 

Here are a few popular places you can start if you’re looking for working capital.

1. Shopify Capital

Shopify offers select businesses, who have a Shopify store, easy access to working capital financing through either a merchant cash advance or a loan. Shopify Capital will use your shop’s sales history to determine if your business is eligible to apply for funding. If you’re approved for funding through Shopify Capital, you make payments automatically through a fixed percentage of your daily sales. Shopify Capital is only available in the US, Canada, the UK, and Australia.

Business funding. Your way.

Eligible businesses in the US, Canada, UK, and Australia using Shopify can login to their store to see if they have an offer through Shopify Capital.

2. BlueVine

BlueVine offers revolving business lines of credit with credit limits of up to $250,000 and six- to 12-month repayment terms for each draw. To qualify, you need to operate or be incorporated in an eligible US state and have been in business for at least six months. Your business also has to have at least $10,000 in monthly revenue, and your personal credit score needs to be above 625 (on a 300 to 850 scale).

You can apply online and get a preliminary decision within five minutes of submitting your application—the entire process will take a little longer if you decide to continue to final approval. However, BlueVine doesn’t work with businesses in Nevada, North Dakota, and South Dakota, and you’ll need to make weekly payments on each draw on the line of credit. 

3. FundBox

FundBox also offers a revolving business line of credit, but the maximum credit limit is $150,000. Businesses in any state can qualify if they have at least three months of transaction history in their business checking account, over $100,000 in annual revenue, and an owner with a personal credit score above 600.

Although it could be easier to get financing with FundBox than other lenders, the lines of credit may have a higher interest rate. Additionally, you can only choose between the relatively short 12- and 24-week repayment terms for each draw.

4. OnDeck

OnDeck offers business lines of credit and a small-business loan with the same minimum requirements: one year in business, a business bank account, at least $100,000 in annual revenue, and a personal credit score of 625 or higher. The term loans are for $5,000 to $250,00 with up to 24-month repayment periods and daily or weekly payments. The line of credit has a maximum limit of $100,000 and weekly payments over a 12-month repayment period that resets every time you take a draw.

There’s a fast online application and funding process. However, the loans and lines of credit may have a much higher interest rate than what you’ll receive from other lenders. OnDeck also doesn’t work with businesses in Nevada, North Dakota, and South Dakota.

5. SBA loans

The SBA doesn’t offer loans directly, but you can use the SBA’s lender matching tool to find lenders that work with businesses like yours and offer the type of loan you want. You can review the SBA loan program overviews to see if you’ll likely qualify and which type of loan could be the best fit. The lenders must abide by the agency’s guidelines for SBA loan requirements, amounts, and rates, but lenders can impose stricter terms if they want.

Working capital financing FAQ

What can working capital financing be used for?

You can generally use the proceeds from working capital financing for almost anything once the cash is deposited into your account. But in some cases there may be restrictions, such as prohibiting you from using the money to pay off personal debts.

What are the benefits of working capital financing?

Working capital financing can quickly give you extra cash to pay for everyday business expenses. You can use the funds to run payroll, buy supplies or inventory, or cover the upfront costs of an exciting new project or unusually large order.

What is the difference between working capital financing and a business loan?

Working capital financing is a form of business financing that owners use to pay for day-to-day expenses. Unlike other types of business loans, working capital financing isn’t intended for long-term investments, such as purchasing costly equipment or renting a new office.

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