What does a working capital loan actually pay for? #
Working capital is the cash you need to run the business between the moment you spend money and the moment customers pay you. A working capital loan covers that gap.
Common uses include:
- Payroll during a slow month, or while a large invoice is still unpaid
- Inventory bought ahead of a busy season
- Rent, utilities, insurance and supplier bills
- A repair to the truck, oven or equipment you cannot operate without
- Hiring or materials to fill a contract you have already won
It fits poorly for buying a building, a machine that will last ten years, or a multi-year expansion. Match the length of the debt to the life of what it buys. Short-lived costs suit short-term money. Long-lived assets suit longer terms.
How are working capital loans priced: factor rate or APR? #
Most short-term business funding is priced with a factor rate, not an interest rate. A factor rate is a multiplier. You receive an amount and repay that amount times the factor.
For example, you receive $100,000 at a 1.25 factor and repay $125,000. The $25,000 difference is the cost. But you repay it over months, not a full year, so the cost has to be measured against that shorter period. A 1.25 factor repaid over 8 months ≈ 65–75% APR. The same 1.25 factor repaid over 12 months ≈ 35–45% APR. The dollar cost is identical, but the APR changes a lot with the term. That is why the factor alone can mislead you.
Bank term loans and SBA loans quote an annual interest rate. Fees can add to the real cost, so ask for the APR on those too. Ask every lender for three numbers in writing:
- The amount you receive
- The total you will repay
- The APR-equivalent
Also ask about origination fees, any holdback from your sales, how often payments are collected, and what happens if you pay early. If a lender cannot give you the APR-equivalent, ask why. A clear lender can answer in one email.
What do lenders require to approve you? #
Requirements vary, but most working capital lenders look at the same handful of things:
- Time in business. Many want at least six months to a year of operating history. Some will look at less.
- Monthly revenue. They want to see steady deposits in your business bank account.
- Bank statements. Expect to provide three to six months.
- Credit profile. Personal and business credit both count, but short-term lenders often weigh recent cash flow more heavily than a single score.
- Existing debt. The lender will add up what you already repay each month and check whether a new payment fits.
Have your recent bank statements, your profit and loss statement or last tax return, and a plain sentence on how you will use the money. A clear use of funds speeds review.
Working capital loan vs. bank term loan vs. SBA 7(a): which fits? #
| Option | Typical cost | Speed | What it needs |
|---|---|---|---|
| Working capital loan | Factor rate, for example 1.25 over 8 months ≈ 65–75% APR. Usually well above bank rates; the APR depends on the factor and the term | Often days to a few weeks | Steady revenue, recent bank statements, a few months to a year in business |
| Bank term loan | Interest rate, usually the lowest per-dollar cost of the three | Often several weeks to a few months | Strong credit, multiple years of history, financial statements, frequently collateral |
| SBA 7(a) loan | Interest rate capped by SBA rules, plus guarantee fees | Commonly a month or more | Detailed documentation, eligibility rules, a personal guarantee |
Banks and SBA loans are the right tool when you have time, strong credit and a purpose that lasts for years: a building, major equipment, or buying out a partner. If you qualify and can wait, they are usually the cheapest money available.
The mistake is treating them as the default for every need. For most owners facing payroll due Friday, the bank route fails on timing, not on price. A slow approval is the cost of a lower rate, and a low rate does not help if the money arrives after the problem does.
Working capital loan vs. line of credit vs. revenue-based financing: which fits? #
| Option | Typical cost | Speed | What it needs |
|---|---|---|---|
| Business line of credit | Interest rate or annual percentage, charged only on the amount you draw | Setup often takes weeks, then you draw as needed | Established history, a credit review, sometimes collateral |
| Merchant cash advance | Factor rate, for example 1.25 over 8 months ≈ 65–75% APR, repaid from a share of card sales or by daily or weekly debits | Often within days | Card sales or daily deposits, a track record of sales |
| Revenue-based financing | Fixed fee or factor rate (for example 1.25 over 12 months ≈ 35–45% APR), repaid as a percentage of monthly revenue | Days to a few weeks | Consistent revenue and clean accounting records |
A line of credit is often the better choice when you need flexibility over a year and can qualify. You pay only for what you draw, and you can draw again after you repay.
Merchant cash advances repaid as a share of sales, and revenue-based financing, have one real advantage: payments move with your revenue. A slow month means a smaller payment. That matters for seasonal businesses. Confirm which repayment structure you are being offered, because some advances use fixed daily or weekly debits. The trade-off is that the APR-equivalent is often high, so compare total cost, not just payment size.
When is a working capital loan the wrong choice? #
A working capital loan is not the answer to every cash problem. Walk away if any of these fit your situation:
- You have months, not days. A bank or SBA loan will almost always cost less if you can wait for it.
- The purchase will last a decade. A short-term loan on a long-lived asset means large payments over a few months for something that pays you back over many years.
- Your margins cannot cover the cost. If the return on what you buy is lower than the APR-equivalent, the money costs you more than it earns. Run that math before you sign.
- The shortfall keeps repeating. Borrowing to cover a recurring loss only delays the problem. Fix the cause first.
What should you do next? #
Start with your timeline. If you need cash in days or weeks for operating costs, a working capital loan is usually the practical path, and the bank route is usually too slow. If you have months and strong credit, get a bank or SBA quote first.
Either way, compare offers on total repayment and APR-equivalent, not the factor rate alone. To see what you may qualify for, send Shieldway Capital your recent bank statements and a line on how you would use the funds. We will review them and match you with options from our network of funding partners. We will also tell you plainly if a bank or line of credit would serve you better.
This guide is general information, not advice for your situation. Figures are illustrative; the terms that apply to you are only those in an agreement you sign. How we work and how we are paid.