What Is Working Capital?
Working capital is the difference between your business's current assets (cash, accounts receivable, inventory) and current liabilities (accounts payable, short-term debt). Positive working capital means you have enough to cover day-to-day operations. Working capital financing bridges gaps when your expenses outpace your incoming revenue, which happens to virtually every growing business at some point.
Types of Working Capital Financing
The landscape of working capital financing includes several distinct products, each with different costs, speeds, and qualification requirements. Understanding the spectrum, from low-cost SBA loans to fast merchant cash advances, helps you choose the right tool for your specific situation. The key is matching the cost and speed of capital to your actual need.
Short-Term Working Capital Loans
Short-term loans (3-18 months) provide a lump sum for immediate needs. Rates range from 8% to 30%+ depending on the lender and your creditworthiness. Online lenders like Bluevine, OnDeck, and Fundbox have made these accessible with quick online applications. Monthly or weekly payments are fixed, making budgeting straightforward. Best for one-time expenses or opportunities with a clear payoff timeline.
Invoice Factoring & Invoice Financing
Invoice factoring lets you sell unpaid invoices to a factoring company at a discount (typically 1-5% of invoice value). You get 80-90% of the invoice value immediately, and the factoring company collects from your customer. Invoice financing is similar but you retain control of collections, the invoices serve as collateral for a loan. Both are excellent for B2B businesses with reliable customers who pay on 30-90 day terms.
Revenue-Based Financing
Revenue-based financing (RBF) provides capital in exchange for a percentage of future revenue until a fixed amount is repaid. Unlike equity financing, you don't give up ownership. Unlike fixed loans, payments flex with your revenue. RBF works well for businesses with strong, growing revenue but limited assets or credit history. Typical repayment is 1.5-3x the original advance.