Cash flow doesn't always follow your schedule. Maybe you have a big invoice in accounts receivable or are heading into your busiest season and need to ramp up now. Or maybe you need a little extra breathing room to keep your business running. Depending on your situation, a short-term working capital loan could offer you relief. Below, we'll explain how short-term business loans work, when to use them and how to manage them strategically.

What's in this article?

• What are short-term business loans for working capital?
  
• Why do businesses use short-term loans to cover working capital needs?
  
• How do short-term loans improve working capital?
  
• Types of short-term working capital loans
  
• How to qualify for a short-term business loan
  
• Pros and cons of short-term working capital loans
  
• How businesses can manage short-term loans effectively
  
• Alternatives to short-term loans for working capital
  

What are short-term business loans for working capital?

Short-term business loans for working capital help businesses cover near-term operating expenses when cash is tight. These loans are for the everyday mechanics of running a business – paying staff, stocking inventory, covering rent and staying operational while waiting for revenue. They aren't for expansions or long-term bets.

Working capital is the money you have available to pay your short-term obligations. When that money runs out – because of delayed customer payments or the timing of your financial obligations – short-term working capital loans can help you cover the gap.

What makes these loans "short term"?

• Timeline: They're typically repaid within 18 months. Some are structured more tightly.

• Purpose: They're used to cover immediate, recurring business expenses, not large capital expenditures.

• Speed: They're designed for quick access to funds, often within days.

Why do businesses use short-term loans to cover working capital needs?

Even strong businesses can hit timing gaps when cash going out moves faster than cash coming in. Short-term working capital loans help businesses move through those gaps without slowing down.

Here are some scenarios when businesses might need short-term loans:

• Cash flow mismatches: Your rent is due. Payroll needs to run. But customer payments are still a few days or weeks away. A short-term loan covers that gap without forcing you to defer obligations or dip into reserves.

• Seasonal swings: When retailers gear up for the holidays or event-based businesses prepare for peak season, expenses ramp up before revenue does. Short-term capital helps you front-load those costs, then pay them off as income flows in.

• Delayed receivables: You've delivered the product or service, but your client won't pay for 30, 60 or 90 days. That invoice is technically revenue, but it's not cash in hand. A loan can keep your operations liquid while you wait.

• Unexpected expenses: When equipment breaks, a vendor increases prices or something needs to be fixed fast, short-term financing gives you options without forcing you to cut corners elsewhere.

• Time-sensitive opportunities: When acting quickly could drive revenue – maybe a supplier offers a discount on bulk inventory, or maybe you want to launch a marketing campaign while customer interest is spiking – short-term financing helps you say yes without hesitation.

Using short-term loans occasionally can be a strategic way to run a business.

How do short-term loans improve working capital?

Working capital refers to the assets you have on hand (cash, inventory and receivables) to meet short-term financial obligations. When that balance starts to tighten, a short-term loan can increase liquidity right away and give your business more room to operate.

Here's how it works:

• You boost your current assets: A short-term loan gives you immediate cash, increasing your working capital. That money can be used to pay suppliers, cover payroll, manage rent or fund other operational expenses.

• You avoid draining your reserves: Without financing, you might have to dip into savings or defer payments. A short-term loan preserves your cash position, so you're not constantly on the defensive with your balance sheet.

• You stay current on payables: Paying vendors and creditors on time keeps those relationships strong and prevents late fees or supply disruptions. It also helps avoid a domino effect, in which one missed payment leads to more.

• You create room for growth: Though the loan is a liability, using it to stabilise operations or invest in something with a quick return on investment (ROI) can ultimately improve your overall working capital position. That's especially true if the borrowed funds help generate revenue that exceeds the cost of borrowing.

Part of the value of a working capital loan is in the flexibility it offers. With Stripe Capital, businesses can receive funds within a day, and repayments are automatically pulled as a percentage of daily sales. That structure increases liquidity upfront and ties repayment directly to your revenue pace.

Types of short-term working capital loans

Short-term working capital loans come in a variety of formats. Each is designed to quickly solve cash issues, but how you borrow, how you repay and what the loan costs can vary. Choosing the right option depends on your business model, the timeline and how you plan to use the funds.

Short-term loans

Short-term loans are a fixed loan amount with a defined repayment period, typically 3 to 18 months. Payments are predictable, often weekly or monthly. They're best when you need a lump sum for a one-time use, such as a bulk inventory purchase or a temporary staffing push. About 8.5% of small and medium-sized enterprises (SMEs) have found these types of loans from banks to be readily available, but they're also available through online lenders and fintech platforms. They're faster to fund than traditional long-term loans, though they usually carry higher interest rates.

Business lines of credit

Business lines of credit are a pre-approved credit limit you can draw from as needed. They're reusable: once you repay what you've drawn, the funds become available again and you pay interest only on what you use. They're often easier to qualify for than a traditional term loan, with quicker access to funds. They work well for recurring, short-term needs such as payroll or inventory restocking.

Merchant cash advances (MCAs)

With MCAs, you get a lump sum up front in exchange for a fixed percentage of your daily sales until the advance is repaid. It's technically not a loan because there's no interest rate – just a flat fee (called a factor rate). Repayments flex with your revenue: they're lower when sales are slow and higher when business is brisk. They're fast to qualify for because lenders focus more on your sales volume than your credit score, but they're usually more expensive than traditional loans.

Stripe Capital uses a similar model, providing eligible businesses with funding based in part on Stripe sales, with automatic repayments that scale with revenue.

Invoice financing and factoring

Invoice financing and factoring turn your unpaid invoices into immediate cash. With invoice factoring, you sell your invoices at a discount to a third party, who collects from your customer. With invoice financing, you borrow against your outstanding invoices but keep control of collections.

These are ideal for B2B or B2G businesses with long payment cycles. They're faster and often easier to qualify for than traditional loans, especially if your customers are creditworthy. Costs vary depending on how long the invoices remain unpaid and the risk profile of your clients.

Business credit cards

Business credit cards provide flexible, fast-access capital for everyday expenses. There's an interest-free grace period if paid in full each month. Otherwise, high annual percentage rates (APRs) can add up fast. These cards are useful for small purchases or temporary cash flow gaps, and responsible use can help build your business credit profile.

Trade credit

With trade credit, your vendors give you extra time to pay for goods or services. There's no interest if you pay on time, which makes it effectively free working capital. It frees up cash while you generate revenue from what you purchased.

Each of these tools serves a different kind of need: some focus on flexibility, some on speed, some on cost efficiency. The best fit depends on your cash flow rhythm, how quickly you need funding, and how long you'll need it.

How to qualify for a short-term business loan

Compared with traditional long-term loans, qualifying for short-term working capital financing is usually faster and more accessible. But lenders still look for a few core signals that show your business can repay on time. Here's what they're typically assessing:

• Time in business: Many lenders require at least 6–12 months of operating history. Some, including Stripe Capital, will consider younger businesses (even 3 months in) if sales volume is strong and consistent.

• Revenue consistency: Lenders want to see that cash is flowing in steadily, even if it's modest. To qualify for Stripe Capital, for example, businesses must process at least $5,000 annually on Stripe, with stable recent volume.

• Credit score: A decent credit score is enough to get in the door with many lenders. Higher scores usually lead to better terms, but your sales performance often carries more weight, especially with cash advances or revenue-based financing. Some options don't require a credit pull.

• Bank statements or sales data: Instead of tax returns or financial statements, many lenders ask for recent bank statements or will connect directly to your sales platforms to evaluate performance. The idea is to confirm you have consistent inflows to support repayment.

Many short-term loans are unsecured, which means no property or inventory is required. You might need to sign a personal guarantee, but putting assets on the line is typically reserved for larger or long-term financing.

Pros and cons of short-term working capital loans

Short-term loans can be incredibly useful. But as with any financing tool, it's important to understand the upsides and the trade-offs.

Pros

• Fast funding: Short-term loans are built for speed, which makes them ideal in moments when a delay would cost you a sale, an opportunity or operating continuity. Many short-term loans can be approved and funded in days or less.

• Flexibility: Most lenders don't restrict how you use the money. That gives you the freedom to apply it where it's most needed.

• Accessibility: These loans often prioritise recent revenue over your credit score. That means newer businesses or those with lower credit ratings might still qualify, especially for revenue-based advances.

• Short commitments: You're not locking in years of debt. These loans are designed to be repaid quickly, often in less than a year. That can help keep your balance sheet clean and your options open.

• No collateral or complex paperwork: Many short-term loans are unsecured, which means you don't have to pledge property or equipment. The application process is typically easier, too.

• Future credit: Handled well, a short-term loan can strengthen your credit profile and improve your chances of qualifying for larger or lower-cost financing later.

Cons

• Higher cost of capital: Speed and flexibility come at a premium. Short-term loans often carry flat fees or higher interest rates than longer-term financing. Some, such as Invoice financing, can have steep effective APRs, depending on how quickly you repay.

• Frequent repayments: Some short-term loans require daily or weekly payments, which can strain your cash flow, especially during a slow sales cycle.

• Smaller amounts: Short-term loans are usually limited in size. If you need £500,000+ to fund a major project, you'll probably need a longer-term loan or multiple financing sources.

• Risk of dependency: If you're constantly borrowing to cover the same gaps, short-term debt can become a habit. Relying on it repeatedly might point to deeper issues with your pricing, collections or cost structure.

• Stacking costs: Taking on multiple short-term loans at once or borrowing to repay another can quickly escalate. Fees stack, cash flow gets tighter and your ability to repay on schedule weakens.

How businesses can manage short-term loans effectively

Getting a short-term loan is only step one. Managing the loan so it helps your business instead of weighing it down is just as important.

Here's how to stay in control:

• Build repayment into your plan: Don't wait until the first payment hits to figure out how you'll cover it. As soon as the loan is funded, map out the repayment schedule alongside your other expenses. If the payments are daily or weekly, adjust your budget to account for that rhythm. Treat the repayment like any other fixed cost.

• Use the funds with purpose: The money should go towards solving the problem or lead to the opportunity that justified the loan in the first place. Whether it's inventory, payroll or a high-ROI campaign, plan for uses that keep your business stable or quickly generate revenue. Don't let the funds drift towards non-essential expenses.

• Track cash flow closely while the loan is active: Repayment eats into your daily liquidity. Monitor your balance regularly, especially if your repayments are tied to sales volume (as with Stripe Capital). If you have a slower week or an unexpected expense, you'll want visibility early so you can adjust accordingly.

• Avoid stacking debt: It's tempting to take on a second loan if the situation feels tight, but layering short-term debt can create more pressure than flexibility. If you find yourself needing multiple loans to stay afloat, it's time to reassess your cost structure, pricing or receivables strategy.

• Have a backup plan if repayment gets tough: If you anticipate missing a payment, talk to your lender before you default. Some might offer flexible terms or temporary relief if you're proactive. You can also explore refinancing – replacing a high-cost, short-term loan with longer-term financing once your business has stabilised.

• Use tools that simplify repayment: Stripe Capital automatically deducts a percentage of your daily sales to repay loans, which makes it easier to stay on track with repayment. That kind of automation reduces the risk of missed payments but still requires you to watch how it's affecting your daily cash position.

Alternatives to short-term loans for working capital

Short-term loans aren't your only option when cash is tight. Depending on your business model, timing and cost tolerance, there are other ways to improve working capital without taking on traditional debt.

Tighten up your working capital cycle

Look at your receivables, payables and inventory. Can you:

• Encourage customers to pay faster with early payment discounts or shorter terms?

• Negotiate longer terms with suppliers?

• Move through inventory more efficiently?

Even small shifts in timing can create breathing room.

Explore grants or subsidies

Government agencies, non-profits and private businesses offer grants and schemes for small businesses. They take effort to apply for and might be restricted in use, but if you qualify, they're non-dilutive and don't require repayment.

Consider longer-term financing

If you don't need the funds right away, it might be worth applying for a longer-term loan through a bank, government scheme or another lender. These options usually have lower rates and monthly payments that are easier to manage over time. The trade-off is more paperwork, slower approvals and stricter qualifications.

Owner investment or equity financing

Instead of taking on debt, you might re-invest profits, draw from personal savings or raise capital from investors. These routes don't require repayment, but they do limit your liquidity or dilute ownership. They're better suited for big-picture growth plans, rather than short-term cash gaps.

Adjust operations, at least temporarily

In some cases, you can consider pausing or slowing certain expenses. Push out non-essential projects, negotiate temporary flexibility with landlords or vendors, or run a promotion to earn cash.

The right alternative depends on what you need: speed, flexibility, low cost or more time to grow.