Ask what the product actually is
Behind the label sits either a term loan, a line of credit, an advance, or a receivables purchase. Each behaves differently on early repayment, on default, and on your balance sheet. Before comparing offers, establish which of the four you are being offered.
The second question is repayment frequency. Monthly, weekly, and daily repayment of nominally similar amounts produce very different cash-flow profiles and very different APRs.
The structural test
Short-term working capital solves a timing gap that will close. If the gap will not close on its own - because margins are negative or a major customer left - borrowing against it converts an operating problem into a debt problem. This is the single most consequential judgement in the category and no lender will make it for you.
Commonly used for
- Bridging a genuine and temporary timing gap
- Payroll continuity through a known seasonal trough
- Inventory purchases that will convert to cash within the term
What to check before signing
- The phrase describes a purpose, not a product - always identify the underlying instrument
- Daily debit schedules are common at the expensive end and are rarely prominent in the offer
- Renewing before the current facility is repaid ('stacking') compounds cost sharply
Working capital: common questions
- What is the cheapest working capital option?
- For businesses that qualify, an SBA Express line of credit or a bank line is normally the cheapest. Speed is what the expensive products sell, and the premium for it is large.