Overview
Short-term working capital loans bridge immediate gaps between cash inflows and business obligations (payroll, supplier bills, inventory). They’re designed for speed and flexibility, not long-term growth, and typically mature within 3–12 months. Because lenders price speed and risk into these products, costs and repayment mechanics can differ widely.

Common loan structures

  • Business line of credit: Revolving access to funds; interest only on outstanding balance; useful for irregular, recurring needs. (See our comparison of lines vs short-term options: Short-Term Working Capital vs Line of Credit: Making the Right Choice: https://finhelp.io/glossary/short-term-working-capital-vs-line-of-credit-making-the-right-choice/)
  • Short-term term loan: Lump-sum disbursement repaid in fixed installments over a short tenor (e.g., 6–12 months).
  • Invoice financing and factoring: Lender advances 70–90% of outstanding invoices; repayment occurs when customers pay. Factoring transfers collections to the factor; invoice discounting keeps collections with you.
  • Merchant cash advance (MCA) / revenue-based advance: Lender buys a portion of future receivables and collects via fixed daily/weekly remittances or a percentage of card sales.
  • Purchase order / inventory financing: Funding tied to specific supplier purchases or inventory that is sold to fulfill orders.

Repayment models explained

  • Fixed-installment repayment: Equal payments (principal + interest) over the term. Predictable but can strain cash if revenues dip.
  • Revolving repayment: Repayment as you draw (common with lines of credit). Interest accrues on outstanding balance; you can reuse capacity.
  • Receivables-linked collection: Lenders take repayments directly from customer receipts or sales (common with factoring and MCAs).
  • Daily/weekly remittance schedules: Higher-cost lenders often require frequent payments to reduce risk exposure.
  • Balloon or single-maturity repayment: Interest-only or deferred principal during term, with a large final payment—riskier for cash-strapped firms.

How lenders price and what to watch for
Lenders use credit history, time-in-business, annual revenue, and sometimes specific collateral (receivables, inventory). Pricing can be presented as APR, a factor rate, or periodic fees. Factor rates used by some short-term lenders are not APR-equivalent; always convert to APR for apples-to-apples comparison. Costs vary: bank products for qualified borrowers may have low single-digit interest, while online short-term products and MCAs can carry much higher effective costs—compare offers carefully (Consumer Financial Protection Bureau: https://www.consumerfinance.gov).

Tax and accounting notes
Interest on working capital loans is generally tax-deductible as a business expense under IRS rules (see IRS guidance on business expenses), but large businesses should confirm limits under the business interest expense limitation rules (Internal Revenue Service: https://www.irs.gov). Treat fees and factor discounts consistently with your accounting policy and consult your CPA.

When to choose which structure

  • Use a line of credit for ongoing, unpredictable needs.
  • Choose invoice financing if receivables are strong but collections are slow.
  • Consider an MCA only when cash flows are highly seasonal and you accept higher cost for fast access.
  • Avoid short-term loans for major capital investments—use term loans or SBA products instead.

Red flags and common mistakes

  • Not calculating total cost (APR vs factor rate).
  • Signing agreements with automatic daily withdrawals without stress-testing cash flow.
  • Using short-term high-cost debt to fund long-term needs; this creates rollover risk.

Practical steps before you borrow
1) Run a 90-day cash flow forecast to confirm the funding gap. (Related: How Cash Flow Projections Impact Working Capital Loan Decisions: https://finhelp.io/glossary/how-cash-flow-projections-impact-working-capital-loan-decisions/)
2) Request an APR equivalent and a sample payment schedule showing total dollars paid.
3) Compare at least three offers and check lender collection mechanics (ACH pulls, lockboxes, percentage-of-sales clauses).

Short example from practice
In my practice I’ve seen a retail client use a 9‑month line to finance seasonal inventory. By modeling expected sales and reserving 1.5× the monthly repayment in a buffer account, they avoided forced early repayment when sales dipped.

Authoritative sources and further reading

Internal resources

Professional disclaimer
This content is educational only and not personalized financial advice. Consult a CPA or licensed lender about your specific situation before borrowing.