How to Fund Working Capital in a Crunch
- Stephanie Pflaum
- 3 hours ago
- 5 min read
Most startups don’t fail because they run out of great ideas — they fail because they run out of cash. Even high-revenue startups can hit cash-flow crunches when payments come in slowly, growth investments outpace bank balances, or expenses spike unexpectedly.
What do you do when you’re low on working capital to keep the lights on, the engineers paid, and your growth engine humming?
Raising equity to fill these short-term gaps doesn’t make sense — it takes too much time and costs too much in the long-run. A loan to fund working capital is usually a far better solution.
TL;DR
The article explains five non-dilutive financing options for startups facing working capital shortfalls.
These options include Revenue-Based Financing (RBF), Lines of Credit, Invoice Financing & Factoring, Inventory or Purchase Order (PO) Financing, and Customer Prepayments & Annual Contracts.
What’s a Working Capital Loan?
A working capital loan is a short-term loan used to finance day-to-day operations — not long-term investments like infrastructure or acquisitions. Think of it as the bridge between “bills due today” and “revenue coming tomorrow.”
When to use it
Smooth out cash-flow gaps
Fund near-term growth investments without giving up ownership or control
Avoid raising equity when valuations are low
Push out runway without taking on longer-term debt obligations
A working capital loan is used to fund daily operating expenses in the short term — NOT long-term assets or growth initiatives.
That distinction is crucial. You wouldn’t use a working capital loan to buy a factory, but you would use it for payroll, marketing, inventory, or vendor payments.
Typical loan characteristics
Term: 6–24 months
Repayment: Weekly or monthly
Cost: Higher than long-term debt, lower than the cost of equity dilution
Use cases: Cash-flow coverage, operational runway, smoothing seasonality
Working capital loan qualifications
Lenders typically review:
Revenue consistency (recurring revenue preferred)
Gross margins
Operating expenses and cash burn
Bank statements and cash flow trends
Payment history and credit scores
Fintech lenders may use real-time revenue data, integrating with accounting tools or payment processors. This has expanded access significantly compared to traditional banking channels and it speeds up the approval process, so you get cash in your account quickly.
Pros and Cons of Working Capital Loans
Advantages
Fast approval
Predictable payments
Allows founders to defer equity raises until valuations improve
No dilution
Good for companies working to scale efficiently
Drawbacks
Short-term repayment pressure
May require collateral or PGs
Higher cost of capital than long-term debt
Not a good fit for pre-revenue startups
5 Financing Options for Funding Working Capital
As mentioned earlier, working capital loans should be used to fund short-term operational expenses — not fixed assets or long-term growth investments.
Some types of working capital loans, like revenue-based financing, can be structured to support and align with longer term growth strategies. So, if you’re planning on making key hires or expanding your sales and marketing capabilities, RBF may still be a great option.
Below are five equity-free financing options for growing startups that need to fund working capital.
1. Revenue-Based Financing (RBF)
Revenue-based financing provides an upfront investment that a startup repays either as a fixed percentage of monthly revenue or in fixed monthly payments, until a predetermined repayment cap is reached. RBF is ideal for SaaS, subscription products, and businesses with predictable revenue streams.
Why founders like it
Payments can flex with revenue (softens the blow during slower months), or they can have a fixed repayment schedule when structured as a term loan
Can be obtained without collateral or personal guarantees
Fast underwriting for recurring-revenue businesses
Good ROI on growth investments
The deeper mechanics
RBF providers underwrite primarily on:
Monthly recurring revenue (MRR)
Customer retention and concentration metrics
Gross margin
Predictability of future revenue streams
Considerations
Cost of capital can be higher with shorter term length compared to long-term (3+ years) RBF loans.
Works best for companies with steady revenue and reasonable cash burn.
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2. Lines of Credit
A line of credit works like a refillable bucket of capital your startup can dip into when needed. It’s similar to a credit card but often with higher limits and lower rates, which allows your startup to borrow, repay, and re-borrow funds up to an approved limit.
When it’s ideal
Seasonal business fluctuations
Cash-flow smoothing
Emergencies (the "customer-paid-late-again" special)
How it works
Banks generally require:
Stronger financial history
Positive cash flow
Some collateral or personal guarantee
Considerations
Fintech lenders have democratized access somewhat, but underwriting standards remain much stricter than RBF. A line of credit is a great financial tool to have, if you can get approved for one.
3. Invoice Financing & Factoring
If you’re a B2B startup and you’re waiting 30–90 days (or, let’s be honest, forever) for customers to pay, there are two ways to use your unpaid invoices to fund working capital.
Invoice financing: You borrow against an unpaid invoice.
Factoring: You sell the invoice at a discount to get cash immediately.
Why founders use it
Unlock cash stuck in accounts receivable
You needed cash, like, yesterday
Approval is based more on customer creditworthiness than yours
Considerations
These loans can be expensive (20 to 40% more than the face value of the loan), and predatory lending is common with little regulatory oversight in this space.
Requires clean invoicing and dependable customers.
4. Inventory or Purchase Order (PO) Financing
Cash gets trapped in different places depending on your business model. For SaaS, it’s typically payroll and growth spend. For e-commerce, retail, CPG, or wholesale? It’s inventory. Lots of it. Sitting in warehouses like glamorous, expensive paperweights.
Inventory and PO financing exist to free that trapped cash — so you can grow without draining your bank account every time you need to purchase inventory.
How it works
Inventory financing: A type of asset-based loan where a lender gives you capital to buy inventory, and the inventory itself serves as collateral. You repay the loan as the goods sell.
PO financing: When you have a confirmed customer order but you don’t have the cash to fulfill it, this type of financing funds the production of goods. Your customer pays the PO financier, who takes their fee and sends you the remainder.
Why founders use it
You don’t tie up cash in physical products.
You avoid turning down large orders you can’t afford to fulfill.
It preserves working capital for payroll, marketing, and operations.
Helps smooth a lumpy supply chain (seasonal spikes, sudden demand surges, long manufacturing lead times).
Considerations
Rates can vary but inventory financing is typically more expensive than a standard line of credit, because lenders take on more risk. Lenders look at sales velocity, SKU concentration, gross margins and more to qualify borrowers.
PO financing is typically more expensive than inventory financing. Approval is based heavily on your customer’s creditworthiness, not just your startup’s financials.
5. Customer Prepayments & Annual Contracts
Think of this as a loan your business gives itself. It’s a deceptively simple financing strategy: get customers to pay up front for annual or multi-year contracts.
Benefits
Zero dilution
Instant working capital, and no interest
Lower churn (customers with annual contracts stay longer)
Offering a modest discount (5–15%) for annual prepayment is common. SaaS companies with annual billing typically show stronger cash flow and higher valuations.
The Bottom Line
Don’t Trade Equity for Short-Term Liquidity
Every founder eventually faces the working-capital tightrope. Between revenue-based financing, lines of credit, invoice and inventory financing, and even an upfront payment strategy, you have a robust toolkit for funding working capital.
Non-dilutive capital isn’t just about preserving ownership—it’s about preserving optionality. The less equity you give up early on, the more control you have later when valuation and leverage truly matter.
