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Working Capital Financing To Grow Your Business

Written by Banks Editorial Team
Updated June 7, 2023
7 min. read
Written by Banks Editorial Team
7 min. read

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Working capital financing involves borrowing money to finance the day-to-day operations of your business rather than purchasing long-term assets or investments.

In other words, you might take out a working capital loan to pay rent, wages, or buy inventory, rather than purchasing office space or equipment for your business.

This type of financing is especially common in industries where cash flow is inconsistent. However, you could also use a working capital loan to finance business growth or expansion, such as opening a branch in a new region. Until the new branch becomes financially self-sufficient, the working capital loan can help fund its operations. 

Find The Best Loan To Grow Your Business

Don’t let cash flow limit your business growth. Check out the variety of business loans to find one that fits your company’s needs.

What is Working Capital Financing?

Working capital financing refers to short-term loans and lines of credit availed by businesses to fund their daily operations and maintain liquidity. Here are three important features of working capital loans:

Expenditure Gaps

When a business is growing, there may be some gaps between capital inflows and outflows due to late payments, emergency expenditures, and other unforeseen factors. During such times, you can use working capital financing to bridge the payment gaps and keep the business afloat. With this type of financing, small and growing businesses don’t have to be solely dependent on accounts receivables to fund their daily operational needs.

Speed and Flexibility

Working capital loans are usually processed more quickly than other types of loans, as most businesses use this money to meet their urgent cash flow needs. Lending institutions understand this and have, therefore, developed faster processing and approval methods for these loans. In addition, many lending institutions also offer more flexible repayment terms to small businesses seeking working capital loans.

Zero Collateral

If you have good business and personal credit scores, then most lenders would approve you for a working capital loan with zero collateral requirements. Not only does this make it easier for small businesses to access the funds they need to sustain their operations, but getting an unsecured loan from a reputed financial institution will also help improve the credibility of your business.

How Does It Differ from Other Types of Business Financing?

Working capital financing has certain distinct features that set it apart from other types of business loans. These are as follows:

  • Working capital loans are short-term in nature, typically with a duration of a year or less. On the other hand, traditional, long-term business loans have a term between a few years to over two decades.
  • Working capital financing often has a revolving structure, allowing businesses to borrow money and make repayments over and over again, as needed. This is in contrast to most traditional business loans that have a fixed repayment term.
  • When granting working capital financing, lenders focus less on collateral assets and more on creditworthiness, cash flow, business performance, and other such factors. Long-term business loans, by contrast, have much stricter collateral requirements.
  • Compared to traditional long-term business loans, working capital loans can usually be obtained quite quickly since they’re needed to cover immediate cashflow gaps or seize short-term growth opportunities.

If you are looking for working capital financing, consider Advance Funds Network. This online lending marketplace can connect you with the right lender offering the short-term loan you need to cover immediate expenses. Advance Funds Network has been helping business owners secure loans since 2007 and has facilitated over 1.8 billion in business funding. Accredited by the Better Business Bureau with an A+ rating and an excellent rating on Trustpilot, they offer a wide range of business loan types, from working capital loans to lines of credit and invoice factoring.

Fill out the online form to contact Advance Funds Network and a business lending expert will contact you to discuss your loan options with no obligation or impact on your credit.

Common Types of Working Capital Financing

Working capital loans can be structured in a variety of ways. Some of the most common types are:

Business Lines of Credit

A business line of credit provides you with a preset credit limit and allows you to borrow as much or as little as you need without exceeding that limit. You can draw on the business line of credit as often as necessary and only need to pay interest on the amount you’ve borrowed instead of the total credit limit. The repayment terms are usually set to be quite short, such as a year or less. 

Merchant Cash Advances

This is an alternative form of working capital financing which allows you to access a lump sum of cash – in return for a percentage of your future credit and debit card sales. However, this financing option comes with relatively high fees, making it more expensive than the others.

Short-Term Loans

With this type of working capital financing, the lender will offer you a lump sum of as much as $500k to cover your day-to-day operational needs. Over the next three to 18 months, you’ll need to pay off this amount, along with the interest. You’ll need to have a good credit score and sizeable collateral in order to qualify for this type of working capital loan.

Invoice Factoring

This working capital financing method allows you to trade your unpaid invoices for an upfront lumpsum payment. The lender buys your unpaid invoices in return for a sizeable amount of upfront cash, which is less than the total amount receivable from the invoices. It then collects the pending payments from your customers or clients to make a profit. This is a good way to raise working capital if you have a poor credit score or payment history.

SBA Loans

If you have a good credit score, then you should apply for a working capital loan backed by the U.S. Small Business Administration (SBA). These loans are popular among business owners since they offer low-interest rates and favorable repayment terms. You can apply for the SBA 7(a) term loans to fund the day-to-day operations of your business while undertaking an expansion or pivoting to a new industry.

Business Credit Card

A business credit card can provide you with revolving credit – as well as a credit-building opportunity – for your business. You can use the business credit card to purchase inventory, make debt payments, and cover any other short-term expenses that might come up. It’ll help keep your business and personal finances separate while also offering benefits like expense tracking and rewards programs.

Find The Best Loan To Grow Your Business

Don’t let cash flow limit your business growth. Check out the variety of business loans to find one that fits your company’s needs.

How to Choose the Right Working Capital Financing Option

Now that you know about the different working capital financing options, you’ll need to figure out which one is right for you. And the best way to do that is to ask yourself the following questions:

What Is Your Credit Score?

Your credit score will have a large impact on what types of working capital financing you can qualify for. If you have a good to excellent credit score, you should apply for a short-term loan or business line of credit from a reputed bank or other financial institution.

This will allow you to borrow the working capital you need at relatively low-interest rates, especially if the loan is guaranteed by the SBA.

On the other hand, if you have a poor credit score, you may have to opt for merchant cash advances or invoice factoring, which have higher fees but don’t put as much weight on the borrower’s credit score.

How Much Collateral Can You Offer?

Another factor to consider is whether you’re looking for a secured or unsecured loan. For example, if you have some assets that you can offer as collateral, then a short-term installment loan might be the best option to tide you over any temporary gaps in your cash flow.

On the other hand, if you don’t want to put up a physical asset as collateral for the loan, then you should apply for a business line of credit, merchant cash advance, or a business credit card. These typically have a higher interest rate but don’t require collateral so long as your business generates a steady stream of revenue.

What Type of Loan Do You Need?

Lastly, you have to figure out what type of financing your business currently needs. Do you need a lump sum of cash that you can repay over a preset repayment schedule? Or do you need to draw small sums of money over an extended period to fund the day-to-day operations of your business?

Depending on the answer to this question, you’ll have to choose between a short-term installment loan (which will provide you with a lump sum) or a revolving line of credit or a business credit card (which will allow you to draw small sums of money as needed). 

How to Grow Your Business with Working Capital Financing

Here are a few of the important ways you can use a working capital loan to help your business grow and flourish.

Improve Cash Flow

Short-term cash flow problems (such as a delayed payment from a client) can leave your business unable to function – without the ability to pay for inventory, utilities, or even the salaries of your employees.

A timely working capital loan can prevent such a disaster by providing you with the cash you need to cover your short-term liabilities and keep the business running. This, in turn, will make your business more resilient by minimizing your dependence on incoming revenues.

Cover Short-Term Expenses and Purchases

A working capital loan can be used to purchase a new piece of equipment needed to grow your production capabilities or to buy inventory for a new branch of the business that is not yet self-sufficient.

All of these activities are designed to help your business grow and prosper in the long term, but they require some upfront investment. And this is where working capital financing can be beneficial for growth, as long as it’s used responsibly.

Sustain Business Operations

Essential business operations like procurement, manufacturing and sales can be disrupted due to insufficient working capital. This could lead to unfulfilled orders, poor quality of products and services, and dissatisfied customers – which would have a negative impact on your company’s reputation and future growth prospects.

A timely working capital loan can prevent this by bridging the gap in cash flow and allowing you to meet the demands of your customers seamlessly. Not only would this help keep your business afloat in the short term, but it will also help build your brand image so that the business can grow and prosper in the long term.

Boost Supplier Relationships

In order to achieve long-term growth, a business must have a strong relationship with its suppliers. This is needed for favorable pricing and discounts on raw materials, reliable and timely deliveries of materials, better negotiation terms, and quality assurance on the raw materials purchased. 

A working capital loan can help ensure that you pay your suppliers in a timely manner, demonstrating that you are a reliable business partner. This will help build trust with your suppliers, making them want to work with you in the future. A good reputation will also increase your negotiating power in future transactions.

Build Business Reputation

Choosing the right working capital loan could help you increase customer satisfaction, improve your brand image, build trust with suppliers, and overall enhance the reputation and credibility of your company.

Reputation is one of the most important factors that will determine the growth and long-term success of your business since customers are much more likely to buy from a company that enjoys goodwill within the community.

Concluding Note

Properly managing cash flow within your business is essential for long-term sustainability and growth. To maintain a healthy flow of working capital, you can optimize the accounts receivable process for on-time payments, keep an accurate record of your debt payments every month, and manage inventory for maximum efficiency.

Lastly, you can choose among a variety of working capital financing options so your business operations can continue without a hitch, even when there’s a cash shortfall. The right type of working capital loan for your business will depend on your goals, industry, and circumstances.

Find The Best Loan To Grow Your Business

Don’t let cash flow limit your business growth. Check out the variety of business loans to find one that fits your company’s needs.

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