Overview

Short-term working capital loans give companies fast access to cash to keep daily operations running — payroll, supplier payments, inventory buys, or short-term growth opportunities. These loans are designed to match temporary timing problems in cash flow rather than long-term capital investments.

Common structures

  • Line of credit: A revolving facility you draw, repay, and redraw as needed. Interest is charged only on the outstanding balance. Lines are often variable-rate and suited for seasonal needs. See our practical guide on business lines of credit for structure and costs for details (Line of Credit for Small Business: Structure and Costs).

  • Invoice financing / factoring: You borrow against unpaid invoices or sell invoices to a factor. Advance rates, reserve holds, and discount fees determine your net proceeds. For a deeper comparison, see our article on invoice financing (Invoice Financing).

  • Short-term term loans: Lump-sum loans with fixed repayment schedules—useful for a single, known expense (e.g., a one-off inventory purchase).

Costs you should expect

Costs vary widely by product, lender risk appetite, and your business profile. Typical ranges (approximate):

  • Line of credit: interest rates commonly range from ~5% to 20% (variable) plus possible annual/maintenance fees.
  • Invoice financing: fees often run 1%–5% of invoice value plus an advance/hold structure; factoring can effectively reach a higher annualized cost if invoices are outstanding for long periods.
  • Short-term term loans: APRs typically range from ~6% to 25% depending on term length and creditworthiness.

Always convert fees into an annualized cost when comparing offers. Online lenders and MCA-style products may quote factor rates instead of APRs; convert factor fees to an APR-equivalent for apples-to-apples comparison.

Eligibility and underwriting

Lenders look at revenue, cash flow, time in business, credit history, and collateral (if any). Many invoice-financing providers underwrite customer credit because they’re effectively advancing on payments owed by third parties. Newer online lenders may accept shorter time-in-business records but charge higher rates.

Real-world example

In my practice I helped a mid-size manufacturer secure a 12-month line of credit to buy raw materials ahead of a seasonal surge. Using the line avoided production delays and allowed the company to pay down the advance from receipts once the season peaked. The flexible draw/repay feature preserved liquidity and avoided a large fixed monthly debt service payment.

When to choose which product

  • Use a line of credit when cash needs fluctuate and you want flexibility.
  • Use invoice financing if you have strong receivables but slow-paying customers and want immediate cash tied to invoices.
  • Use a short-term term loan for a one-time expense where a fixed repayment schedule fits your cash flow.

Common mistakes to avoid

  • Focusing only on headline interest rates and ignoring fees, holdbacks, and prepayment penalties.
  • Using short-term high-cost debt to fund long-term investments—match term to purpose.
  • Not modeling worst-case scenarios: run a conservative cash-flow projection showing how you’ll repay if revenues dip.

Practical checklist before you borrow

  1. Calculate the all-in cost (convert fees to an APR-equivalent).
  2. Confirm repayment schedule aligns with expected cash inflows.
  3. Read covenants and default triggers closely.
  4. Compare at least three offers from different lender types (bank, online, factoring firm).

Authoritative sources

  • U.S. Small Business Administration — types of loans and lender programs (sba.gov).
  • Consumer Financial Protection Bureau — business lending basics and disclosure best practices (consumerfinance.gov).

Interlinks

Professional disclaimer

This article is educational and does not replace personalized financial or legal advice. Terms and rates change; consult your accountant, lender, or a qualified advisor for decisions specific to your business.

In my experience, short-term working capital products can be an efficient, lower-cost bridge when used appropriately, but they require clear repayment planning and attention to fees and covenants to avoid costly surprises.