Types of Working Capital Loans : Keeping Your Cash Flowing

Let’s be honest for a minute: Cash flow is the number one thing that keeps business owners up at night.

You can have a fantastic year on paper. You can have a stack of signed contracts on your desk. But if your clients take 60 days to pay you, and your payroll is due this Friday, none of that “paper success” matters. You are stuck in the classic trap of being asset-rich but cash-poor.

This is precisely where working capital loans come in.

Unlike a mortgage for a new building or a loan for a massive piece of machinery, working capital loans aren’t for the “glamorous” stuff. They are for the boring, essential engine oil that keeps your business running: payroll, rent, inventory, and utilities. They bridge the gap between when you spend money to do the work and when you actually get paid for it.

But here is the tricky part: Not all of these loans work the same way. If you pick the wrong one, you could end up paying huge fees for money you didn’t really need. If you pick the right one, it can be the lifeline that lets you sleep soundly on Thursday nights.

Here is a plain-English breakdown of the different types of working capital loans, how they actually work, and which one fits your specific situation.

1. The Business Line of Credit (LOC)

Think of this like a credit card on steroids.

A Business Line of Credit is probably the most flexible tool you can have in your back pocket. Instead of giving you a pile of cash all at once, a lender approves you for a limit let’s say $50,000.

You don’t have to touch it. It can sit there for months costing you absolutely nothing. But the moment you have a slow month, or a truck breaks down, you can draw $5,000 from it.

Why business owners love it:

You only pay interest on the money you actually use. If you don’t use the other $45,000, it’s free. Once you pay back the $5,000, your limit goes back up to the full $50,000. It’s a revolving safety net that gives you total control.

Want to dig deeper? Check out the specific Business Line of Credit benefits to see if this flexibility fits your style.

2. Short-Term Business Loans

Think of this as a quick cash injection.

Sometimes, you don’t need a safety net for “someday.” You need a lump sum of cash right now to solve a specific problem. Maybe your main oven just died, or perhaps you have a limited-time chance to buy inventory at a 20% discount if you pay upfront.

Short-term business loans give you that cash immediately. You then pay it back over a short period, usually 3 to 18 months.

The Reality Check:

Because these loans are fast we’re talking approval in 24 to 48 hours you pay for that speed. The interest rates are usually higher than a traditional bank loan. You have to ask yourself: “Is the problem I’m solving worth the cost of the loan?” If you’re buying inventory that will make you a considerable profit, the answer is usually yes.

3. Invoice Financing (Accounts Receivable)

Think of this as getting paid early.

This one is a favorite for construction companies, marketing agencies, and anyone in the B2B world.

If you have done the work, sent the invoice, and are now stuck waiting 60 days for your client to cut a check, you are essentially acting as a free bank for your client. Invoice financing stops that.

You sell that unpaid invoice to a lender. They give you about 80% to 90% of the cash immediately. When your customer finally pays the bill weeks later, the lender gives you the rest of the money (minus a small fee).

Why it works:

It unlocks money you have already earned. Using invoice financing for small business expansion is a smart move because you aren’t taking on debt based on your credit score; you are leveraging your sales.

4. Merchant Cash Advance (MCA)

Think of this as an advance on your future sales.

If you run a restaurant, a retail store, or any business that swipes a lot of credit cards, an MCA might be on your radar.

This isn’t technically a “loan.” The lender gives you cash today, and in exchange, they take a percentage of your daily credit card sales until the advance is paid back.

The Good and Bad:

The approval is incredibly fast, and they don’t care much about your credit score. However, this can be the most expensive option on the list. Since payments come out of your sales daily, you need to make sure your profit margins are healthy enough to handle that dip in daily cash flow.

5. SBA Working Capital Loans

Think of this as the “Holy Grail” (if you have the time).

If you are planning for next year and want the cheapest money possible, look at the Small Business Administration (SBA).

The SBA 7(a) loan is fantastic because the government guarantees a chunk of it. This makes banks willing to give you lower interest rates and longer repayment terms (up to 10 years for working capital).

The Catch:

The paperwork is intense. We’re talking binders of documents. And the timeline is slow often 2 to 3 months. If you need cash for payroll this Friday, the SBA is not your answer. But for long-term stability? It’s hard to beat.

Compare the options: Read our guide on government vs private small business loans to decide if the wait is worth it for you.

Real-World Scenario: The “Seasonal Slump”

To see how this actually works, let’s imagine a landscaping company in the Northeast.

In April and May? They are slammed. Money is pouring in. But in January? Revenue drops to zero because of the snow. The problem is, they still have to pay rent on their warehouse and keep their best crew members on payroll so they don’t quit.

• The Wrong Move: Taking a high-interest short-term loan that demands huge daily payments in February (when they have no income). That kills the business.
• The Right Move: Opening a Business Line of Credit. They draw funds in January just to keep the lights on, and then pay off the line of credit in April when the spring rush starts.

Matching the type of loan to your cycle of business is the secret to success. This is one of the key benefits of a working capital loan it smooths out the peaks and valleys.

How to Qualify: What Lenders Actually Look For

Getting approved for working capital is generally easier than getting a mortgage, but you still need to have your ducks in a row. Most lenders look at the “Three Cs”:

1. Cash Flow: Do you have money coming into your business bank account? Lenders want to see that you can afford the loan payments. They will usually ask to see your last 3 to 6 months of bank statements.
2. Credit: While some alternative lenders are lenient, your personal score still matters. If your score is above 650, you unlock cheaper options. If it’s lower, you can still get funded, but it might cost a bit more.
3. Consistency: Lenders love boring, predictable businesses. They want to see that you have been in business for at least 6 months (preferably a year) and aren’t bouncing checks.

It is also vital to understand that lenders look at your profit vs profitability. It’s not just about how much you sell; it’s about whether you keep enough money to pay them back.

Important Note: Don’t Buy Trucks with Working Capital

A common mistake we see is business owners using a generic working capital loan to buy a big piece of machinery or a vehicle.

Don’t do that.

If you need to buy a truck or a specialized machine, get an Equipment Loan instead. Because the equipment itself acts as collateral (like a car loan), you usually get a much better interest rate. Working capital is for expenses, not assets.

So, Which One Should You Choose?

It really comes down to three simple questions:

1. How fast do you need it?
   • Emergency? Look at a Short-Term Loan or Line of Credit.
2. What is the money for?
   • Waiting on clients to pay? Use Invoice Financing.
   • Buying inventory? Use a Line of Credit.
3. What does your credit look like?
   • Great credit + plenty of time? Go for the SBA Loan.

The goal of working capital isn’t to put you in debt; it’s to smooth out the bumps in the road so you can focus on growing.

Need Help Navigating These Options?

Every business is different. A restaurant in Florida has different needs than a construction company in Ohio.

At Making Moves Investments, we don’t believe in a “one size fits all” approach. We help you look at your cash flow and figure out exactly which type of financing will help you sleep better at night.

Contact us today, and let’s get your cash flow moving in the right direction.