Which working capital option is right for my small business: line of credit, term loan, revenue-based funding, or invoice factoring?
Short answer: A line of credit fits uneven, recurring cash needs. A term loan fits a one-time cost you can repay over a set schedule. Revenue-based funding fits businesses with steady sales that want payments tied to revenue. Invoice factoring fits B2B businesses waiting on unpaid customer invoices. The right choice depends on why you need the money and how your cash comes in.
What "working capital" funding actually covers
Working capital is the money you use to run the business day to day: payroll, inventory, rent, supplies, and bills that come due before your customers pay you. Working capital funding fills the gap between money going out and money coming in. It is different from funding a big long-term asset, though some options can do both.
Before comparing products, write down three things:
- What the money is for (a seasonal inventory buy, a payroll gap, a new contract).
- How long you need it (weeks, months, or years).
- How your revenue arrives (daily card sales, monthly invoices, project payments).
Those three answers usually point to the right option.
Option 1: Business line of credit
How it works
You get access to a set credit limit. You draw what you need, pay interest only on what you use, and the available amount refills as you repay.
Best for
- Recurring or unpredictable gaps, like slow months or waiting on receivables
- Having a cushion ready before you need it
Watch for
- Draw fees, maintenance fees, or annual fees
- Whether the rate is variable (it may move with the prime rate)
- Periodic reviews where the lender can lower or freeze the limit
Option 2: Term loan
How it works
You receive a lump sum up front and repay it on a fixed schedule, usually with regular payments over a set term.
Best for
- One-time costs with a clear payoff: an expansion, a large inventory order, a renovation, or refinancing more expensive debt
- Owners who want a predictable payment to plan around
Watch for
- Origination fees and any prepayment penalty
- Paying interest on the full amount even if you do not use it all right away
Option 3: Revenue-based funding
How it works
You receive money up front and repay it from a share of future revenue, often through automatic withdrawals from your bank account. This category includes products sometimes called merchant cash advances (MCAs). Technically, many MCAs are structured as a purchase of future receivables rather than a loan, and the cost is often expressed as a factor rate instead of an interest rate.
Best for
- Businesses with consistent sales that may not fit bank requirements yet
- Short-term needs where speed matters more than lowest cost
Watch for
- The total payback amount, not just the factor rate
- Daily or weekly withdrawals and how they affect your cash flow
- Stacking several of these at once, which can strain cash flow quickly
Because cost is quoted differently, convert any offer into total dollars repaid and compare it side by side with loan offers.
Option 4: Invoice factoring
How it works
You sell unpaid customer invoices to a factoring company. It advances you a portion of the invoice value now and pays the rest, minus its fee, after your customer pays.
Best for
- B2B businesses with creditworthy customers who pay on 30-, 60-, or 90-day terms
- Growing companies whose cash is tied up in receivables
Watch for
- Fees that grow the longer your customer takes to pay
- Whether the factor contacts your customers directly
- "Recourse" terms, which can make you responsible if a customer does not pay
Side-by-side comparison
| Line of credit | Term loan | Revenue-based funding | Invoice factoring | |
|---|---|---|---|---|
| How you get money | Draw as needed | Lump sum | Lump sum | Advance on invoices |
| How you repay | Pay back what you draw | Fixed schedule | Share of revenue / frequent withdrawals | When your customer pays |
| Typical use | Recurring gaps | One-time project | Short-term needs | Slow-paying B2B customers |
| Key cost to check | Rate + fees on draws | Rate + origination fee | Total payback amount | Fee per period outstanding |
How to choose in four steps
- Match the term to the need. Short-term gaps call for short-term funding. Do not finance a multi-year project with something you repay in a few months.
- Compare total cost in dollars. Ask every funder for the total repayment amount and all fees.
- Check the payment against your cash flow. Look at your bank statements and confirm the payment schedule fits how money actually comes in.
- Compare more than one offer. Different funders look at different things, so one application across several options can save you time.
Frequently asked questions
Is a line of credit better than a term loan? Neither is better in general. A line of credit fits recurring or uncertain needs; a term loan fits a one-time expense with a clear repayment plan.
Is revenue-based funding the same as a loan? Not always. Many revenue-based products, including MCAs, are structured as a purchase of future receivables. Read the contract and compare the total payback amount to loan offers.
Can I use invoice factoring if I sell to consumers? Usually not. Factoring depends on unpaid invoices owed by business or government customers.
Can I have more than one type of working capital funding? Sometimes, but every new payment affects your cash flow and future approvals. Make sure combined payments fit comfortably in your budget.
Compare your working capital options with Pro Capital
Pro Capital is a small business funding marketplace. One application lets you see options from multiple funders, including lines of credit, term loans, and other working capital products. Applying is free and has no credit impact. Approval and terms depend on each funder's review.
Start your free application and compare your options. Pro Capital: Funding Made Simple.