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Working capital funding, explained without the sales pitch
Working capital is the cash that keeps the doors open between paying for things and getting paid. "Working capital funding" covers several very different products that all promise to fill that gap. Here is how to tell them apart.
First, the formula
Working capital = current assets − current liabilities. Cash, receivables, and inventory minus what you owe in the next twelve months. If the number is thin or negative, small timing problems (a late customer, a big supplier invoice) become emergencies. Funding buys time; it does not fix a business that loses money every month. How to calculate yours and what a healthy number looks like.
The three products sold as "working capital"
| Product | Structure | Cost quoted as | Repayment |
|---|---|---|---|
| Revenue-based advance | You receive a lump sum and owe a fixed payback amount | Factor rate (a multiplier such as 1.25 in our examples) plus fees | Fixed daily or weekly debits for a set number of weeks |
| Short-term working capital loan | A true loan with a stated term, often 3–18 months | Interest rate or APR plus origination | Weekly or monthly payments |
| Working capital line of credit | Revolving limit you draw against | Interest on the drawn balance plus fees | Minimum payments; re-borrow as you repay |
The words on the website matter less than the contract. A "loan" with a fixed payback and daily debits is economically an advance. A "cash flow solution" that charges interest on a declining balance is a loan. Read for how the cost is computed and what happens if you pay early.
What it really costs
Advances quote a factor rate because it sounds small. In an illustrative example, a 1.25 factor on $20,000 over 26 weeks is $5,000 of cost, but because you repay weekly, your average balance is about half the advance, so the estimated APR is roughly 98% (nominal) on the net amount after a 2% fee. Loans quote APR, which already accounts for that. Use the factor rate calculator to put both on the same footing.
Early payoff does not by itself reduce an advance’s payback. The payback amount is fixed when you sign. Some contracts include a prepayment discount; ask for it in writing before signing, not after.
When a working capital advance is the right tool
- A short, specific gap with a clear end: materials for a signed job, payroll before a large receivable lands, a repair that halts revenue.
- You have checked that the daily or weekly payment fits your slowest week, not your average week.
- You do not already have another advance running.
When it is the wrong tool
- Covering ongoing operating losses. The payments make the hole deeper.
- Financing something with a multi-year payoff (equipment, a build-out). Match the term to the asset instead: equipment financing or a term loan.
- Stacking on top of an existing advance. Why stacking is the quiet killer.
What providers typically look at
Revenue-based products lean on bank statements: average monthly deposits, number of deposits, ending balances, and negative-balance or insufficient-funds days. Time in business and existing obligations typically weigh heavily; personal credit is often still checked. Each provider sets its own criteria. What underwriters actually look for.
What Fast Mula is and isn't. Fast Mula helps you compare business-funding structures and submit one inquiry. Nothing on this site is an offer, approval, guaranteed rate, or guaranteed timeline. Any funding depends on a provider's own review, and terms vary by state.
Common questions
Is a working capital loan the same as a merchant cash advance?
Not legally, and not always economically. A merchant cash advance is a purchase of future card receivables repaid as a percentage of card sales. A working capital advance usually debits a fixed amount on a schedule. Both use factor rates. Details on MCAs here.
How much working capital should I take?
Enough to close the specific gap plus a small buffer, and no more. Requesting more than roughly one month of revenue from a revenue-based product is usually a sign the structure is wrong for the need.
Can I get working capital funding with bad credit?
Often yes, because deposits matter more than scores for revenue-based products. Expect higher cost. Options and trade-offs.
Related
Merchant cash advance
How a receivables purchase differs from a loan.
Fast Mula
Our path for smaller, faster needs.
What funding costs, by amount
Payment tables with stated assumptions.
Can’t repay an MCA
Practical steps, in order.
Use of funds
Purpose decides the structure.
See which options fit your numbers
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