Working Capital Financing: What Are the Different Options?

by Kieran Daly
January 24, 2024
Working Capital Financing: What Are the Different Options?

If you have a small business, you know how important it is to have the cash to pay for your operating expenses. From making sure your employees are paid, to paying rent, to ordering new inventory, having funds is essential to running a business.

But sometimes things happen that make paying for your day-to-day operations difficult. This is where working capital financing can help. Whether you’re waiting on your customers to pay their invoices or experiencing a seasonal cash flow gap, working capital financing can help you keep your business running.

Let’s take a deep dive into how working capital works and the different types of financing available.

What Is Working Capital Financing? 

Working capital financing is when a company borrows money to cover its day-to-day operational expenses. That can include things like payroll, rent, and inventory. This type of financing is often used to help small businesses stay afloat during times of financial stress. It’s generally not used to purchase equipment or to invest in real estate.

Companies can also use working capital to expand into new regions and scale up their business. For example, if a company wants to open in a new city, it can use working capital to finance its operations while the business is getting established. 

Another way to use working capital is to help bridge a cash flow gap. For example, if a small business is struggling to pay its employees during the off-season, it can use a working capital loan or advance to pay for its operations until its customers return.

6 Types of Working Capital Financing

There are many types of working capital options that companies can use to pay for their business expenses. Here are some of the most common working capital financing options that business owners can get.

1. Loans 

Loans, including short-term loans, can be used for working capital. In most cases, when you get a loan, you receive an upfront lump sum from a lender. You must pay it back according to the lender’s repayment terms.  

You can get both secured and unsecured loans from a traditional bank or credit union. SBA loans are also a viable option for small businesses, as they are backed by the U.S. Small Business Administration and offer competitive interest rates. But keep in mind, not all SBA loans can be used for working capital, as they often have specific terms and conditions about what the funds can be used for.

However, it can be more difficult to get approved for a loan from a traditional or SBA lender, as small business loan approval rates appear to have stagnated. Depending on your creditworthiness, you may have to put up collateral or provide a personal guarantee.

The other downside to getting a loan is that you only get it once. That means if the money runs out before you can make a profit, you may need to take out another loan. This makes it a less viable option compared to other working capital financing options for small businesses.

2. Business Lines of Credit

A business line of credit can be used by companies that need selective financing, meaning they need the ability to pick and choose when they need cash during certain times of the year. With a line of credit, you draw on the funds when you need them. When you pay the money back, the funds become available again. It’s similar to business credit cards in that it’s a revolving line of credit.

A line of credit is one of the most flexible financing options for small businesses. It can be used on a long-term basis as often as needed. 

You can get a business line of credit through a financial institution like a bank or from an alternative lender like Backd. In most cases you’ll need to be in business for at least a year and have a decent credit score, as well as a minimum amount in monthly or annual revenue.

3. Working Capital Advances

A working capital advance is a lump sum that you receive to help you pay for your operating expenses. It's essentially a short-term loan that can be used to pay for your company's overhead. But unlike a loan, it’s based on your business cash flow and revenue. 

Working capital advances have daily,  weekly, or semi-monthly payment plans. They are generally short-term, meaning you need to pay back the money in 12 to 16 months. In some cases, you may need to put up collateral, although that depends on the financing company. (With Backd, no collateral is required.)

You can generally get funding quickly and the application process is usually pretty straightforward. This makes a working capital advance a great option for businesses that need funding quickly. 

4. Trade Credit 

Trade credit is a type of financing where a trader allows its customers to purchase goods or services and pay them back at a later date. In other words, the seller extends credit to the buyer.

When a trade credit deal is made, the terms are outlined in the agreement. Trade credit is offered in various increments, such as seven, 30, 60, or 90 days — or sometimes longer.

For small businesses, trade credit can give you time to expand or develop your business by giving you the inventory you need without having to pay for it upfront. However, the biggest drawback is you will need to pay interest to the seller, which could make the items or services more expensive than if you paid for them upfront.

5. Invoice Financing

Invoice financing, or invoice factoring, is when you borrow money against the money that customers owe you. This option is best if you have customers who aren’t paying you quickly enough. Instead, the invoice financing company gives you a portion of the invoices upfront, then collects the invoice payments and keeps a percentage for themselves. 

Invoice financing can be used by companies that have a lot of unpaid invoices. The biggest downside is that your customers will deal directly with the invoice company, which may not be ideal for all business models.   

6. Merchant Cash Advances

With a merchant cash advance, you get a lump sum of cash based on your future credit or debit card sales. This type of funding is best for businesses that make a lot of credit or debit card sales, such as online retailers.

A merchant cash advance can be a good option for borrowers who have a bad credit score, as most MCA lenders don’t usually take creditworthiness into account. However, you may need to make daily or even weekly payments, which could make it difficult to manage your cash flow. And your payments are not reported to credit bureaus, which may not be ideal if you’re trying to build up your credit history. 

How to Choose the Right Financing Option for Your Small Business

If your business is often short on cash or you’re looking to expand but don’t have the capital, then working capital funding may make sense. What type of financing option you should get will depend on your business needs.

As you’ve learned, there are lots of funding options to choose from. So how do you choose which type of financing to get? First, think about what you need the financing for. For example, do you have a cash flow issue you need to solve, or are you looking to expand into a new area? Or maybe you are looking for a short-term loan to get you through an unusually slow sales season. 

Next, consider how your business is performing. You’ll need to show your finances to lenders. Take note of your monthly revenue and outstanding invoices or accounts receivable.  

Another factor that can influence which type of working capital financing you should apply for is your credit history. For example, if you have poor credit, you might have higher interest rates if you apply for bank loans. Or you may want to stick to an option that doesn’t take credit history into account.

Explore Your Financing Options With Backd

Working capital financing can help keep your small business afloat, even during a downturn or seasonal dip in activity. There are many options to choose from to meet your business needs—from loans to invoice factoring to business lines of credit and working capital advances.

And whatever your business financing needs, Backd can help. Backd offers both a business line of credit and working capital advance to help your business. 

With Backd’s working capital advance, for example, you can get up to $2 million with no collateral required. And with term lengths of up to 16 months, you can get flexible repayment terms. 

If you need revolving credit, Backd offers a business line of credit of up to $750,00 with competitive rates. You can draw funds whenever you need and use the money for any of your business needs. 

Start the application process today, and find out your eligibility in just 24 hours.

What would you do with the right amount of capital?

Working Capital Advance

Easy payment structures offer amounts with fast turnaround, Simple and easy process to access working capital.

  • Flexible - no collateral required
  • $10K - $2M
  • Terms up to 16 months
  • Automatic daily or weekly, or semi-monthly payments

Business Line of Credit

Get instant access to revolving credit with unlimited terms, and the best rates for your business.

  • Draw funds anytime
  • $10K - $750K
  • Unlimited terms, incredible rates
  • Soft credit pull that doesn't affect your credit score