Short-term working capital, advance or loan

The full guide

The gap between paying out and getting paid

Working capital is the cash you have to run the business after short-term bills are covered. A gap opens when bills come due before customers pay. Payroll lands on Friday, but the general contractor pays your invoice in 60 days. A landscaper buys mulch and fuel in March for jobs that pay in May. A shop orders holiday stock in September.

Funders we track list the same uses: payroll, inventory, rent, hiring and seasonal slowdowns. What these have in common is a clear source of repayment. The money you borrow turns into sales or collected invoices within weeks or months, and those receipts pay the funding back.

Measure the gap in days before you measure it in dollars. Count from the day you pay a supplier or crew to the day the related customer money lands in your account. A 45-day gap funded with a 9-month product means you keep paying long after the need has passed.

That is the test for any short-term product. If the gap closes on its own within the term, short-term funding can make sense. If it keeps reopening every month, the problem is margin or cash flow, and borrowing will make it more expensive, not smaller.

Advance or short-term loan

Short-term advances

The funder pays you now and buys a fixed dollar amount of your future sales. One funder we track publishes factor rates from 1.13 to 1.50, and another starts at 1.11. A factor of 1.25 on $50,000 means you repay $62,500, a cost you know before you sign. A true advance should carry a reconciliation right if sales fall. The merchant cash advance page explains the contract terms.

Short-term loans

One lender we track offers short-term loans from $2,500 to $400,000 over 6 to 21 months, repaid by daily or weekly debits. It charges a 3% origination fee and asks for 3 years in business, a 600+ credit score and a personal guarantee. The same lender screens out businesses with more than $175,000 in tax liens or judgments and any open or dismissed bankruptcy in the last 24 months. Loans usually need a longer track record than advances. In return, interest stops accruing when you pay the balance down, which can make early payoff worth it.

Pricing both offers side by side

Take 2 hypothetical offers for the same $30,000, each repaid weekly over 9 months.

In this example the loan costs about $3,000 less, even though "30%" sounds higher than "1.25." The factor rate applies to the full amount for the whole term, while interest only runs on the balance you still owe. The origination fee raises the loan's estimated APR above its 30% rate, because you receive $29,100 but repay against $30,000.

Early payoff widens the gap. Pay the loan off after week 20 and you will have paid $2,680.46 of its interest, saving the remaining $907.09. Pay the advance off at the same point and you still owe the rest of the $37,500 unless the contract grants an early payoff discount.

Real offers rarely line up this neatly. Terms differ, fees differ and not every business qualifies for the loan. The compare offers tool puts any 2 quotes on the same basis, and our guide on how to compare funding offers lists the questions to ask each funder.

Test the payment against a slow month

Convert every payment to a monthly figure first. The advance above takes $961.54 a week, about $4,167 a month (52 weeks divided by 12). The loan takes about $3,732 a month. A daily debit works the same way: multiply by the business days in the month.

Then pull your slowest month from the last 12. Subtract rent, payroll, suppliers and any debits you already carry. If the new payment does not fit in what is left, the offer is too big or the term is too short, however good the price looks. Funders look at the same statements for negative days and bounced items, so a debit that pushes your balance below zero hurts twice.

Watch the calendar as well as the amount. A 9-month term that starts in October runs through January and February. If those are your slow months, ask for a term that ends before them, or borrow less.

The daily payment calculator converts any factor, term and frequency into the debit you would see on your statement.

Match the product to how the gap closes

If the gap closes when a known customer pays a known invoice, invoice factoring or a short-term loan often fits better than an advance, because the repayment date is predictable. If it closes through a busy season of card sales, an advance with a true holdback lets payments follow sales. If gaps open and close all year, a revolving line of credit usually beats taking a new lump sum each time.

Your profile narrows the choice. With a year or more in business and a credit score around 600 or higher, ask for short-term loan offers as well as advances. With a shorter history or a lower score, advances may be the only offers available, so the comparison comes down to factor, term and fees. Retailers facing Q4 inventory will find more on seasonal patterns on our retail stores page.

Openbook matches your file to funders whose published criteria fit, names every funder before submitting and shows each offer with total payback, cost in dollars, payment, term and estimated APR. You choose one or walk away.

Pros and cons