Cash flow doesn't always follow your business plan. Even when a business is growing, the timing of money in versus money out can get tight, especially if you're waiting on customer payments, stocking up for a seasonal surge or covering up-front costs to deliver work you've already sold. Working capital financing is designed to cover those in-between moments, keeping your business running while you're waiting for cash to come in. This type of financing is in high demand, with the global working capital loan market expected to experience a compound annual growth rate of over 10% from 2024 to 2032.

Below, we'll explain what financing options are available and how to choose the right fit based on how your business operates.

What's in this article?

• What is working capital financing?
  
• What types of working capital financing are available?
  
• How do you choose the right financing option for working capital?
  
• What are the best strategies for financing working capital?
  
• How Stripe Capital can help
  

What is working capital financing?

Working capital financing is short-term funding that helps a business cover its immediate operating expenses – such as payroll, rent or inventory – when there's a gap between money going out and money coming in.

This kind of capital isn't used to fund long-term growth or major investments. It covers the gap in cash flow – for example, when expenses land before revenue clears, when a customer pays late or when you need to front costs to fulfil a contract or stock up for a seasonal surge. The purpose of working capital financing is to give the business liquidity to keep running without waiting on receivables or depleting reserves.

What types of working capital financing are available?

There are many types of working capital financing available for businesses. The right solution depends on how your business makes money, what kind of gap you're trying to cover and how quickly you need funds.

Here's a rundown of the major types of working capital financing.

Short-term business loans

You receive a lump sum up front and pay it back on a fixed schedule (usually within 18 months), plus interest. It can be secured, with collateral, or unsecured – based on your credit and cash flow.

This option works best for one-time expenses you know you can repay on a clear timeline, such as making a large inventory order, staffing up for a big project or fronting costs before a known receivable hits.

Business lines of credit

With this type, you get access to a revolving account you can draw from as needed, up to a limit. You pay interest only on what you use, then repay it and reuse it as needed.

This option works best for recurring or unpredictable shortfalls, such as covering payroll while waiting on payments, buying time during seasonal dips or having a buffer for emergencies. You'll want to look out for built-in fees (some banks charge to keep the line open) and variable interest rates. Make sure your limit is high enough to solve your business problem.

Business credit cards

For short-term expenses that you can pay off quickly – such as travel, software and supplies – you can open a credit card tied to your business.

This type of financing works best for fast, flexible access to credit with a relatively low barrier to entry. Watch out for high interest if you carry a balance, as well as the temptation to rely on the card for long-term needs. It's best used as a stopgap, not a strategy.

Trade credit (also called supplier credit)

You buy from suppliers or vendors now and pay later – typically 30, 60 or 90 days after delivery.

This option works best for freeing up cash without taking on interest-bearing debt. It's especially useful if you turn over inventory quickly. If you pay late, trade credit can strain supplier relationships or cost you discounts, so be careful how you use it.

Invoice financing or factoring

With invoice factoring, you sell the invoice to a third party which collects from your customer. With invoice financing, you borrow against the invoice and repay when your customer pays you. Both are ways to turn unpaid invoices into cash quickly.

This method works best for businesses with large or slow-paying clients. It can get you cash in the door without waiting 30, 60 or 90 days. Look out for fees, which can stack up fast, especially if your customers take a while to pay. In factoring, your customers will typically know someone else is collecting, which can impact customer relationships.

Merchant cash advances (MCAs)

With MCAs, you get an advance now, then repay it as a percentage of future sales – often daily or weekly.

This type of financing works best for businesses with steady card or online sales. Repayments scale with your revenue, so they're manageable over time. You'll want to look out for a high effective annual percentage rate (APR), which can happen if you repay quickly. Make sure the cost makes sense for the benefit.

How do you choose the right financing option for working capital?

The right financing option depends on what your business needs, how you operate and how much risk you can absorb.

Here's how to navigate the thought process.

What's the use case?

Some funding comes with usage restrictions, while others are more flexible.

Match the financing tool to the job:

• If you're covering payroll for a few weeks while accounts receivable (AR) catches up, consider a short-term loan, line of credit or invoice financing.

• If you're fronting inventory for a sales spike, consider a short-term loan, trade credit or merchant cash advance.

• If you're covering regular cash flow dips, consider a merchant cash advance or line of credit.

Know how much you really need

If you borrow too little, it won't solve the problem. If you borrow too much, you're paying interest on idle capital.

• If you have a small, short-term need, a credit card or trade credit might suffice.

• If you have a larger project, you might need a loan or merchant cash advance.

• The size of the ask can help narrow your choices down.

Factor in timing

The more urgent or recurring the need, the more flexibility you'll want:

• If you need funds fast, look at online lenders or merchant cash advances.

• If you have time to apply and wait, government-backed loan options – such as Small Business Administration (SBA) working capital loans in the US – might offer better terms.

• If you expect to borrow regularly, a revolving credit line or invoice factoring can give you repeat access without re-applying every time.

Match repayment structure to your cash flow

Most loans have fixed payments, which offer predictability but can strain you in lean months. Variable repayment, a feature of merchant cash advances and credit lines, flexes with your income – but it might cost more over time.

If your revenue is inconsistent, fixed repayment could be risky. But if your sales are steady, it might save you money.

Weigh the true cost

Calculate the total dollar cost. Include fees, repayment schedule and the time period you'll carry the debt. Make sure the return on the capital justifies the cost.

Check your eligibility

Collateral can open doors to better loan terms. If you've been in business a few months (not years), a merchant cash advance or invoice factoring might be easier for you to access compared to more traditional forms of credit. If you don't have a high credit score, look for underwriting that's based on sales or invoices rather than credit alone.

Start with options that align with the day-to-day realities of your business.

What are the best strategies for financing working capital?

Working capital financing is supposed to help you cover a shortfall or front a cost you'll earn back. But the way you use it matters as much as the type you choose.

Leverage these strategies to help you make sure that working capital financing is solving the right problem for your business.

Make your working capital cycle less painful

Before you borrow, look at how cash moves through your business. There might be easier fixes than financing.

For example:

• If your customers are taking too long to pay, you can tighten terms or add a small early-pay discount.

• If you're paying vendors faster than you need to, wait until the due date.

• If you're holding too much inventory, that's cash sitting on a shelf.

Small shifts in timing can free up money and reduce how much outside funding you need.

Set up credit before you actually need it

It's often easier to get better terms when you're not in desperate need. A credit line or short-term loan is easier to negotiate when your cash position looks good and your books are current. Consider setting it up in advance, even if you don't touch it right away.

Know what the money is for

A working capital loan should fund something specific, such as inventory, payroll, a vendor pre-pay or a marketing push. Use it for that purpose and track exactly what you spend, rather than letting the money disappear into the general churn.

Don't build your operating plan around debt

Consistently borrowing just to keep the business running is a flawed business model. If you're taking on new debt to pay off the old debt on a regular basis, it's time to pause and fix the root cause.

Consider other ways to cover a shortfall

Depending on your business, there might be other ways to get through a cash crunch, such as:

• Asking for a deposit or partial pre-payment from a customer

• Delaying a discretionary expense

• Running a limited promo to pull revenue forward

• Looking into startup grants or local incentives

All of these options can help reduce your reliance on external capital and make the capital you do raise go further.

Keep your operating plan flexible

Sometimes, the best strategy is staying nimble. If possible, push a payment back by a week, hold off on a restock or re-route a team to focus on revenue.

How Stripe Capital can help

Stripe Capital offers revenue-based financing solutions to help your business access the funds it needs to grow.

Stripe Capital can help you:

• Access growth capital faster: Get approved for a loan or merchant cash advance in minutes, without the lengthy application process and collateral requirements of traditional bank loans.
  
• Align financing with your revenue: Capital's revenue-based structure means you pay a fixed percentage of your daily sales so payments scale with your business's performance. If the amount that you pay through sales doesn't meet the minimum due each payment period, Capital will automatically debit the remaining amount from your bank account at the end of the period.
  
• Expand with confidence: Fund growth initiatives such as marketing campaigns, new hires, inventory expansion and more, without diluting your equity or personal assets.
  
• Use Stripe's expertise: Capital provides custom financing solutions informed by Stripe's deep expertise and payments data.
  

Learn more about how Stripe Capital can fuel your business growth or get started today.