Are Online Business Loans Safe? Complete Security Checklist

Every business has bills that need paying before the revenue rolls in. Payroll, rent, inventory, supplies, insurance. These day-to-day costs do not wait for your customers to pay their invoices or for your busy season to arrive. According to the Federal Reserve's Small Business Credit Survey, 56% of small businesses struggle to cover operating expenses, and 51% deal with uneven cash flow. Working capital loans exist to solve exactly this problem.

Whether you are bridging a seasonal gap, stocking up on inventory before a big quarter, or simply keeping the lights on while waiting for receivables to clear, working capital financing gives you the breathing room to run your business without interruption. At Fundwell, working capital solutions are one of the most common reasons business owners come to us, and we have seen how the right funding at the right time can make or break a growing company. This guide covers what working capital loans are, how they work, the different types available, and how to get one.

What Is Working Capital

Before diving into loans, it helps to understand what working capital actually means. In simple terms, working capital is the money your business has available to cover its short-term obligations. It is the difference between what you own right now (current assets) and what you owe right now (current liabilities).

How to Calculate Working Capital

The Export-Import Bank and other federal agencies even use working capital as a key metric when evaluating business health. The formula is straightforward.

Working Capital = Current Assets - Current Liabilities

Current assets include cash, accounts receivable, inventory, and any other assets you can convert to cash within a year. Current liabilities include accounts payable, short-term debt, payroll obligations, and taxes due within the same period.

For example, if your business has $200,000 in current assets and $150,000 in current liabilities, your working capital is $50,000. That means you have $50,000 of cushion to cover daily operations after meeting all your short-term obligations.

What Is a Good Working Capital Ratio

You can also measure working capital as a ratio by dividing current assets by current liabilities. Using the same example above, $200,000 divided by $150,000 gives you a working capital ratio of 1.33.

Most financial experts consider a ratio between 1.2 and 2.0 to be healthy. A ratio below 1.0 means your liabilities exceed your assets, which signals potential trouble meeting short-term obligations. A ratio significantly above 2.0 could mean you are sitting on too much idle cash or inventory that could be deployed more effectively. The ideal range depends on your industry, but for most small businesses, landing between 1.2 and 2.0 indicates you are in a solid financial position.

Why Working Capital Matters for Your Business

Positive working capital means you can pay employees, suppliers, and other obligations on time without scrambling for cash. It also gives you the flexibility to take advantage of opportunities as they come up, like a bulk discount from a supplier or an unexpected large order. Negative or thin working capital, on the other hand, forces you into reactive mode. You end up making decisions based on what you can afford this week rather than what is best for the business long term.

What Is a Working Capital Loan

A working capital loan is a form of short-term business financing designed specifically to cover everyday operating expenses rather than long-term investments like equipment or real estate. Think of it as fuel for your daily operations. It keeps the engine running when there is a gap between money going out and money coming in.

How Working Capital Loans Work

Working capital loans typically provide a lump sum or a revolving credit line that you repay over a short period, usually six to 24 months. Depending on the lender, repayments may be made monthly, weekly, or even daily. The amount you can borrow depends on your revenue, creditworthiness, and the type of financing you choose. Unlike loans for specific assets like equipment or real estate, working capital loans generally do not require you to specify exactly how the funds will be used. This flexibility is one of their biggest advantages.

What You Can Use Working Capital Loans For

Working capital financing can cover virtually any short-term business expense. Common uses include:

• Covering payroll during slow periods
• Purchasing inventory ahead of peak season
• Paying rent, utilities, and insurance premiums
• Funding marketing campaigns or short-term projects
• Bridging the gap while waiting for customer payments
• Taking advantage of vendor discounts for early or bulk payment

Pros and Cons of Working Capital Loans

Working capital loans solve a real problem, but they are not the right fit for every situation. Here is how the benefits and drawbacks stack up.

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Types of Working Capital Financing

Working capital is not a single product. It is a category of financing with several options, each suited to different situations. Understanding the differences helps you choose the most cost-effective path.

Business Lines of Credit

A business line of credit is one of the most flexible working capital tools available. You get approved for a maximum amount and draw funds as needed, paying interest only on what you use. Once you repay, those funds become available again. Lines of credit are ideal for businesses with recurring but unpredictable cash flow needs, like covering payroll during a slow month or bridging the gap between invoicing and payment. For a deeper comparison, see our guide on business line of credit vs term loan differences.

Short-Term Loans

A short-term business loan gives you a lump sum upfront with a fixed repayment schedule, typically over three to 18 months. These are a good fit when you know exactly how much you need and can predict when your revenue will cover the repayment. Short-term loans from online lenders can fund in as little as one to two business days, making them a practical option when speed matters.

SBA Working Capital Loans

The SBA 7(a) Working Capital Pilot program allows small businesses to borrow against their accounts receivable and inventory through an SBA-backed revolving line of credit. SBA working capital loans offer lower interest rates than most alternatives, but the application process takes longer and requires more documentation. If you have the time and meet the qualification criteria, SBA loans can be one of the most affordable working capital options available.

Revenue-Based Financing

Revenue-based financing is an increasingly popular working capital solution, especially for businesses with variable income. Instead of fixed monthly payments, you repay a percentage of your monthly revenue. When sales are strong, you pay more. When things slow down, your payments drop automatically. This built-in flexibility makes RBF well suited for seasonal businesses, e-commerce companies, and any business where revenue fluctuates month to month. At Fundwell, revenue-based financing is one of our most requested products because it aligns repayment with what a business can actually afford at any given time.

Invoice Financing

If your business invoices other companies and waits 30, 60, or 90 days for payment, invoice financing lets you unlock that trapped cash. A lender advances you 80% to 90% of the invoice value upfront, and you receive the balance (minus fees) when your customer pays. This is not technically a loan. It is an advance on money you have already earned, which makes it one of the least risky forms of working capital financing for B2B businesses.

Merchant Cash Advances

A merchant cash advance (MCA) provides a lump sum in exchange for a percentage of your future credit card sales. While MCAs offer fast access to capital, they are one of the most expensive forms of financing available. Effective APRs can range from 40% to over 350%. For most business owners, other working capital options like a line of credit or revenue-based financing provide similar speed with far more favorable terms. We covered MCAs in depth in our guide to merchant cash advances if you want to understand the full picture before considering this route.

Here is how these working capital options compare at a glance:

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How to Qualify for a Working Capital Loan

Qualification requirements for working capital financing are generally more flexible than those for long-term business loans. Here is what most lenders look for.

Credit Score Requirements

Traditional banks and SBA lenders typically require personal credit scores of 680 or higher. Online lenders are more flexible, with many accepting scores as low as 550 to 600. Some forms of working capital financing, like invoice financing and revenue-based financing, place less emphasis on your credit score and focus more on your business's revenue and financial health. Fundwell evaluates your full financial picture rather than relying on a single credit score, which helps business owners who may not fit neatly into a traditional bank's criteria.

Time in Business and Revenue

Most lenders want to see at least six months to one year of operating history and minimum annual revenue between $50,000 and $100,000. SBA lenders may have higher thresholds. The key metric lenders care about is whether your business generates enough consistent revenue to cover loan payments alongside your existing expenses. Having three to six months of bank statements that show steady deposits goes a long way toward demonstrating this.

Documentation You Will Need

The documentation required depends on the lender and loan type. Traditional banks and SBA lenders will ask for more, while online lenders keep it streamlined. At minimum, expect to provide:

• Three to six months of business bank statements
• Business tax returns (one to two years for banks and SBA)
• Profit and loss statement
• Balance sheet
• Proof of business ownership and a valid ID

With Fundwell, the process starts with a simple application and a few months of bank statements. From there, we match you with the right product and walk you through anything else needed for your specific financing type.

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Working Capital Loan Rates and Costs

Cost is one of the most important factors when choosing working capital financing. The cheapest option on paper is not always the best value when you factor in speed, flexibility, and total repayment.

Interest Rates by Lender Type

Working capital loan rates vary widely depending on where you borrow. According to the Federal Reserve Bank of Kansas City, traditional bank rates for short-term business loans range from approximately 6% to 12% APR. SBA working capital loans fall between 9.75% and 14.75% based on the current prime rate. Online lenders charge anywhere from 8% to over 80% APR, with most creditworthy borrowers landing in the 10% to 30% range. Revenue-based financing is quoted as a factor rate, typically between 1.1 and 1.5, which means you repay 10% to 50% more than the amount advanced.

Common Fees

Beyond the interest rate or factor rate, watch for fees that can increase your total cost of borrowing. These commonly include:

• Origination fees of 1% to 6% of the loan amount
• Draw fees on lines of credit, charged each time you access funds
• Maintenance fees or annual fees for keeping a credit line open
• Prepayment penalties that charge you for paying off the balance early
• Late payment fees that add up quickly on daily or weekly repayment schedules

Always ask for a full fee breakdown before signing. A loan with a low interest rate and high origination fees can end up costing more than a slightly higher rate with no fees.

How to Compare the True Cost

The most reliable way to compare working capital options is to look at the total cost of capital, which is the total amount you will repay minus the amount you borrowed. For products quoted with an APR, this is relatively straightforward. For factor-rate products like revenue-based financing or merchant cash advances, multiply the advance amount by the factor rate. A $100,000 advance with a 1.25 factor rate means $125,000 in total repayment, or $25,000 in cost. Comparing total cost of capital across your options gives you a clear, apples-to-apples picture regardless of how different lenders quote their pricing.

How to Choose the Right Working Capital Solution

With several options available, picking the right one comes down to matching the financing structure to your specific business needs.

Match the Financing to Your Cash Flow Pattern

If your cash flow is relatively steady, a short-term loan with fixed payments may be the simplest and most affordable option. If your revenue swings significantly from month to month, revenue-based financing or a line of credit provides more flexibility. If you are waiting on large invoices from B2B clients, invoice financing targets the exact problem without adding traditional debt to your balance sheet.

When a Line of Credit Makes More Sense Than a Loan

If you are not sure exactly how much you need or when you will need it, a line of credit gives you ongoing access to capital without committing to a fixed repayment schedule. You only pay for what you use, and the funds replenish as you pay them back. For businesses that experience periodic cash crunches rather than a single shortfall, a line of credit is usually more cost-effective than taking out multiple short-term loans.

When to Consider Revenue-Based Financing

Revenue-based financing makes the most sense when your business has strong monthly revenue but unpredictable timing. Seasonal businesses, e-commerce companies, and service businesses with project-based income all benefit from repayments that flex with their sales. It is also a strong option for business owners whose credit score does not reflect their actual ability to repay, since RBF providers focus primarily on revenue performance. Fundwell's revenue-based financing is built around this exact principle, matching your repayment to what your business actually earns each month.

When a Working Capital Loan May Not Be the Right Fit

Working capital loans are designed for short-term needs, and using them for the wrong purpose can create more problems than they solve.

If you need funding for a long-term investment, like purchasing real estate, major equipment, or making an acquisition, a term loan or SBA loan with a longer repayment period will typically be more affordable and better structured for that purpose. Using short-term working capital financing for long-term expenses means higher costs and a repayment timeline that does not match the return on your investment.

Similarly, if your business is consistently unable to cover operating expenses regardless of timing, a working capital loan may provide temporary relief but will not fix the underlying issue. In that case, reviewing your pricing, costs, and business model is a more sustainable path forward than layering on additional debt.

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Keep Your Business Moving with the Right Funding

Cash flow gaps are a normal part of running a business. What matters is how you manage them. Working capital loans give you the flexibility to keep operations running, pay your team on time, stock inventory when you need to, and take advantage of opportunities without waiting for receivables to clear.

The key is choosing the right type of working capital financing for your situation. Whether that is a line of credit for ongoing flexibility, revenue-based financing that adjusts to your sales, or a short-term loan for a specific need, the right solution keeps your business moving forward without unnecessary cost or risk.

Fundwell offers multiple working capital options through a single, fast application. See what you qualify for today and get the funding your business needs to keep growing.

Frequently Asked Questions

How fast can you get a working capital loan?

It depends on the lender. Online lenders and alternative financing platforms like Fundwell can often approve applications within hours and fund within one to three business days. Traditional banks may take one to four weeks, and SBA loans can take four to eight weeks or longer due to the additional documentation and government guarantee process.

Do working capital loans require collateral?

Most working capital loans do not require specific collateral like real estate or equipment. However, many lenders require a personal guarantee, which means you are personally responsible for repaying the loan if the business cannot. SBA working capital loans may use a blanket lien on business assets. Unsecured options are available, particularly through online lenders, though they typically come with higher interest rates.

Can startups get working capital loans?

Some lenders work with businesses that have as little as six months of operating history. Online lenders and revenue-based financing providers tend to be more flexible with newer businesses, provided you can show consistent monthly revenue. SBA microloans are another option for startups. Traditional banks generally require at least two years of operating history for working capital products.

What is the difference between a working capital loan and a term loan?

A working capital loan is typically a short-term product (six to 24 months) designed to cover everyday operating expenses. A term loan is longer-term financing (one to ten years) intended for larger investments like equipment, real estate, or business expansion. Working capital loans usually have faster funding and more flexible qualification requirements, while term loans offer lower rates and larger amounts.

How much working capital does a small business need?

A common rule of thumb is to maintain enough working capital to cover three to six months of operating expenses. However, the right amount depends on your industry, business model, and cash flow patterns. Seasonal businesses may need more working capital heading into their slow season, while businesses with steady recurring revenue may need less. Calculating your working capital ratio (current assets divided by current liabilities) and targeting a ratio between 1.2 and 2.0 is a practical way to gauge whether you have enough.

Getting a small business loan can feel overwhelming, especially if you have never applied for one before. Between credit requirements, document checklists, and dozens of lender options, it is easy to get lost before you even start. The good news is that the process is more straightforward than most people think, and a majority of businesses that apply for financing receive some or all of the amount they request, according to the Federal Reserve's Small Business Credit Survey.

This guide walks you through everything you need to know about getting a small business loan, from qualification requirements and loan types to a step-by-step application process and what to do if you get denied. Whether you are launching a new venture or scaling an established business, the right funding can make all the difference. At Fundwell, we have helped thousands of business owners navigate this process and secure over $1 billion in funding, so we have seen firsthand what works and what trips people up.

What You Need to Qualify for a Small Business Loan

Before you start comparing lenders, it helps to understand what they are looking for. While every lender has its own criteria, most evaluate the same core factors when deciding whether to approve your application.

Credit Score Requirements

Your credit score is one of the first things lenders check. Most traditional banks and credit unions look for a personal credit score of 680 or higher, though some will consider applicants with scores as low as 620. Online and alternative lenders tend to be more flexible, with some accepting scores in the 500 to 580 range.

If your business has been operating for a while, lenders may also check your business credit score through agencies like Dun & Bradstreet, Experian Business, or Equifax Business. A strong business credit profile can help you qualify for better rates and larger loan amounts.

Time in Business

Most traditional lenders prefer businesses that have been operating for at least two years. This track record gives them confidence that your business can generate consistent revenue and handle debt payments. If your business is newer than two years, you still have options. SBA microloans, revenue-based financing, and some online lenders work with businesses that have as little as six months of operating history.

Annual Revenue

Lenders want to see that your business brings in enough money to cover loan payments on top of existing expenses. Minimum revenue requirements vary widely. Traditional banks may require $250,000 or more in annual revenue, while many online lenders set their minimums between $50,000 and $100,000 per year. Some providers, including Fundwell, focus primarily on your monthly revenue trends rather than rigid annual thresholds, which can open doors for growing businesses that are profitable but have not yet hit the revenue benchmarks larger banks require.

Cash Flow and Debt Service Coverage

Beyond raw revenue, lenders look at your cash flow to determine whether your business can comfortably handle additional debt. Many use the debt service coverage ratio (DSCR), which divides your net operating income by your total debt payments. A DSCR of 1.25 or higher is generally considered healthy, meaning your business generates 25% more income than it needs to cover its debts. If your DSCR falls below 1.0, most lenders will view your application as high risk.

Collateral and Personal Guarantees

Some loans require collateral, which is an asset the lender can seize if you default. Common forms of collateral include real estate, equipment, inventory, and accounts receivable. Secured loans typically offer lower interest rates because the lender takes on less risk.

Many lenders also require a personal guarantee, which means you agree to repay the loan from your personal assets if the business cannot. Unsecured loans exist, but they generally come with higher rates and stricter revenue requirements. Understanding these tradeoffs early helps you choose the right loan structure for your situation.

Types of Small Business Loans

Not every loan works for every situation. The right choice depends on how much you need, how quickly you need it, and what you plan to use the funds for. Here is a breakdown of the most common options.

Term Loans

A term loan gives you a lump sum of money upfront that you repay in fixed installments over a set period, typically one to ten years. These are a good fit for large, one-time investments like buying equipment, expanding to a new location, or funding a major project. Interest rates from traditional banks typically range from 6.3% to 11.5%, according to recent Federal Reserve data.

SBA Loans

SBA loans are partially guaranteed by the U.S. Small Business Administration, which reduces the lender's risk and allows them to offer more competitive rates. The most popular program is the SBA 7(a) loan, which can be used for working capital, equipment, real estate, and debt refinancing. Current SBA 7(a) fixed rates range from approximately 9.75% to 14.75%, depending on loan size and terms. The tradeoff is a longer approval process, often four to eight weeks, and more extensive paperwork than other options.

For smaller funding needs, the SBA Microloan program provides up to $50,000 through nonprofit intermediary lenders, making it a good option for newer businesses that may not qualify for a full SBA loan.

Business Lines of Credit

A business line of credit works like a credit card for your business. You get approved for a maximum amount and draw funds as needed, paying interest only on what you use. Lines of credit are ideal for managing cash flow gaps, covering seasonal expenses, or handling unexpected costs. Once you repay what you borrowed, the funds become available again.

Equipment Financing

If you need to purchase machinery, vehicles, or other equipment, equipment financing uses the equipment itself as collateral. This often makes approval easier and rates lower compared to unsecured options. Loan terms typically match the expected useful life of the equipment, and you may be able to finance up to 100% of the purchase price.

Revenue-Based Financing

Revenue-based financing (RBF) provides a lump sum that you repay as a fixed percentage of your monthly revenue. When sales are strong, you pay more. When business slows down, your payments decrease automatically. This flexibility makes RBF especially useful for businesses with seasonal or variable income. Unlike traditional loans, RBF providers focus more on your revenue history than your credit score, and funding can happen in as little as 24 hours. Fundwell's revenue-based financing option is one of our most popular products for exactly this reason, particularly among business owners who want predictable repayment without the rigidity of a fixed monthly bill.

Invoice Financing

If your business invoices other companies and waits 30, 60, or 90 days for payment, invoice financing lets you borrow against those outstanding invoices. You receive a percentage of the invoice value upfront, typically 80% to 90%, and the rest (minus fees) when your customer pays. This is a practical way to smooth out cash flow without taking on traditional debt.

The following table compares these loan types at a glance:

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How to Get a Small Business Loan in 7 Steps

Once you understand your options, the application process becomes much more manageable. Follow these steps to give yourself the best chance of approval.

1. Define Why You Need the Funding

Start by getting clear on what the money is for. Lenders will ask, and a specific answer builds confidence. There is a big difference between "I need working capital" and "I need $75,000 to purchase inventory ahead of our peak season, which historically increases revenue by 40%." The more precise your purpose, the stronger your application.

2. Calculate How Much You Need to Borrow

Borrowing too little can leave you short, while borrowing too much increases your costs and debt burden. List every expense the loan needs to cover, get actual quotes where possible, and add a small buffer of 10% to 15% for unexpected costs. This level of detail shows lenders you have done your homework and have a realistic plan.

3. Check Your Credit Scores

Before applying anywhere, check both your personal and business credit scores. You can get your personal credit report for free at AnnualCreditReport.com and check your business credit through Dun & Bradstreet, Experian, or Equifax. If your scores need improvement, you may want to spend a few months paying down debt and correcting any errors before applying. Even small improvements can mean better rates and terms.

4. Gather Your Financial Documents

Having your documents ready before you apply speeds up the process significantly. Most lenders will ask for some combination of the following:

• Business and personal tax returns (two to three years)
• Bank statements (three to six months)
• Profit and loss statements
• Balance sheets
• Business plan or executive summary
• Articles of incorporation or business license
• Government-issued photo ID

Online and alternative lenders often require less documentation. Some only need a few months of bank statements and a simple application to get started.

5. Research and Compare Lenders

Do not accept the first offer you receive. Compare at least three to four lenders across different categories: your current bank, an SBA lender, and one or two online or alternative lenders. Look beyond the interest rate and compare total cost, fees, repayment terms, prepayment penalties, and funding speed. A loan with a slightly higher rate but no origination fee and faster funding might save you money in the long run. One advantage of working with a platform like Fundwell is that you can explore multiple loan types through a single application, which saves time and lets you compare options side by side.

6. Submit Your Application

Once you have chosen a lender, submit your application with all required documents. Be responsive throughout the process. Lenders may request additional information, and delays on your end can push back your timeline by days or weeks. Traditional bank and SBA loans typically take two to eight weeks for approval, while online lenders can often provide a decision within one to three business days.

7. Review Your Loan Offer Carefully

Before signing anything, read the entire loan agreement. Pay close attention to the interest rate (fixed or variable), total repayment amount, payment frequency, origination and closing fees, prepayment penalties, and any personal guarantee requirements. If anything is unclear, ask the lender to explain it. A few hours of careful review can save you thousands of dollars over the life of the loan.

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Where to Get a Small Business Loan

Where you apply matters almost as much as what you apply for. Different lender types serve different needs, and understanding the tradeoffs helps you find the right fit.

Traditional Banks and Credit Unions

Banks and credit unions offer the lowest interest rates, but they also have the strictest qualification requirements. Expect to need strong credit (680+), at least two years in business, and solid financials. The application process is thorough and can take several weeks. If you have an existing relationship with a bank, that can work in your favor, as some institutions offer preferred rates to current customers.

SBA Lenders

SBA loans are issued by approved lenders (banks, credit unions, and some online platforms) but backed by the federal government. This guarantee means lenders can offer more favorable terms than they otherwise would. The FDIC recommends comparison shopping among SBA lenders, since terms are negotiated between you and the individual lender within SBA guidelines.

Online and Alternative Lenders

If speed and accessibility matter more than getting the absolute lowest rate, online lenders may be the right choice. Many offer streamlined applications you can complete in minutes, with decisions in one to three days and funding shortly after. Requirements are typically more flexible. Some work with credit scores as low as 500 and businesses with as little as six months of history. The tradeoff is that rates can be higher than traditional banks, but for businesses that need capital quickly or do not qualify for conventional financing, this path gets you funded when time matters.

Fundwell falls into this category, but with a few key differences. Rather than offering a single loan product, Fundwell matches you with the right financing option from multiple products, including term loans, lines of credit, revenue-based financing, and SBA loans. The application takes minutes, approvals can come the same day, and you work with a real person throughout the process. That combination of speed, flexibility, and human support is what sets the best online lenders apart from both traditional banks and purely automated platforms.

Here is how these lender categories compare:

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How Much Does a Small Business Loan Cost

Understanding the true cost of a loan goes beyond the advertised interest rate. Here is what you should factor into your calculations.

Interest Rates by Loan Type

Interest rates vary significantly depending on the type of loan, your creditworthiness, and the lender. As a general benchmark, traditional bank loan rates ranged from 6.3% to 11.5% in the third quarter of 2025, according to the Federal Reserve Bank of Kansas City. SBA 7(a) loan fixed rates currently fall between 9.75% and 14.75%, based on the current prime rate of 6.75%. Online lenders can charge anywhere from 8% to well over 50%, depending on the borrower's risk profile.

Fees to Watch For

Interest is not the only cost of borrowing. Common fees that can increase your total cost include:

• Origination fees, typically 1% to 6% of the loan amount, deducted at funding
• Application or underwriting fees, charged by some lenders regardless of approval
• Prepayment penalties, which charge you for paying off the loan early
• Late payment fees, usually a flat fee or percentage of the missed payment
• Draw fees on lines of credit, charged each time you access funds

Always ask for a complete fee schedule before committing to any loan. A loan with a low interest rate but high origination fees may end up costing more than an alternative with a slightly higher rate and no fees.

Calculating the True Cost of a Loan

The annual percentage rate (APR) is the most reliable way to compare loan costs because it includes both the interest rate and most fees. For a deeper look at how credit affects your rate, see our breakdown of business loan interest rates by credit score. For non-traditional products like revenue-based financing, lenders may quote a factor rate (such as 1.2 or 1.3) instead of an APR. To understand the real cost, multiply your loan amount by the factor rate. For example, a $100,000 advance with a 1.3 factor rate means you will repay $130,000 total. Knowing how to compare these different pricing structures helps you make an informed decision.

What to Do If Your Loan Application Is Denied

Getting turned down is more common than you might think, and it does not mean you are out of options. Understanding why you were denied and what to do next can get you closer to the funding you need.

Understanding Why You Were Denied

Lenders are required to provide a reason for denial. The most common reasons include insufficient credit history or a low credit score, inadequate time in business, weak cash flow relative to the loan amount, too much existing debt, and incomplete or inaccurate application information. Knowing the specific reason allows you to address it directly rather than guessing.

Steps to Strengthen Your Next Application

If your credit score was the issue, focus on paying down existing balances and ensuring your credit report is accurate. If cash flow was the concern, look for ways to increase revenue or reduce expenses before reapplying. Building a longer operating history by waiting three to six months can also make a meaningful difference. Some business owners also benefit from opening a business credit card and using it responsibly to build a separate credit profile for their company.

Alternative Funding Options

If traditional lenders are not the right fit right now, several alternatives may work for your situation. Platforms like Fundwell specialize in connecting business owners with the right funding option based on where they are today, not just where a bank thinks they should be.

• Revenue-based financing focuses on your business revenue rather than your credit score, with flexible repayments that adjust to your sales
• SBA microloans offer up to $50,000 through nonprofit lenders with more lenient qualification criteria
• Business credit cards can provide short-term funding and help you build credit history simultaneously
• Crowdfunding platforms let you raise capital from customers and supporters, though this works best for consumer-facing businesses
• Grants, while competitive, are available through the SBA and various state and local programs with no repayment required

The key is matching the funding type to your current situation rather than forcing a fit with a product you do not yet qualify for.

Tips for Improving Your Approval Odds

Beyond meeting basic requirements, these practical steps can strengthen your application and help you secure better terms.

• Prepare a clear business plan. Even if the lender does not formally require one, a concise plan that explains your business model, market, and financial projections demonstrates competence and builds lender confidence.
• Separate your business and personal finances. Open a dedicated business bank account if you have not already. This makes your financials cleaner and shows lenders you run a legitimate operation. The FTC recommends establishing your business credit profile as a separate entity.
• Build your business credit proactively. Open a business credit card, pay vendors on time, and work with suppliers who report to business credit bureaus. Even a few months of positive reporting can improve your profile.
• Apply for the right loan amount. Requesting more than your financials support is a common reason for denial. Be realistic about what your cash flow can handle and borrow accordingly.
• Consider offering collateral or a co-signer. If your credit or revenue is borderline, offering an asset as collateral or bringing in a co-signer with strong credit can tip the scales in your favor.
• Time your application wisely. Apply when your business financials look their strongest. If you know your Q4 numbers will be better than Q2, waiting a quarter can mean the difference between approval and denial.

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Find the Right Funding for Your Business

Getting a small business loan does not have to be complicated. Start by understanding what lenders are looking for, explore the loan types that match your needs, and prepare a strong application. If you do not qualify for one type of financing today, there are alternative paths that can help you access capital while you build your credit and operating history.

The most important step is the first one. Whether you need a small business loan, a line of credit, or a flexible funding option like revenue-based financing, exploring your options puts you in control. The right funding partner will be transparent about costs, fast when you need them, and supportive throughout the process.

See what you qualify for today and take the next step toward growing your business.

Frequently Asked Questions

What credit score do I need for a small business loan?

It depends on the lender. Traditional banks typically look for personal credit scores of 680 or higher. SBA lenders often require 680 as well, though some may accept 650 with strong financials. Online and alternative lenders may approve borrowers with scores as low as 500 to 580. Your business credit score also matters for larger loan amounts and better terms.

How long does it take to get approved for a business loan?

Approval timelines vary widely by lender type. Online lenders can often provide a decision in one to three business days, with funding shortly after. Traditional bank loans typically take two to six weeks. SBA loans have the longest timeline, often four to eight weeks or more, due to the additional paperwork and government guarantee process.

Can I get a small business loan with no collateral?

Yes. Many online lenders and alternative financing providers offer unsecured loans that do not require collateral. Revenue-based financing and some business lines of credit also do not require you to pledge specific assets. However, unsecured options generally come with higher interest rates, and most lenders will still require a personal guarantee.

What is the easiest type of business loan to get?

Revenue-based financing and short-term online loans tend to have the most accessible qualification criteria. These options focus more on your recent revenue and business performance than your credit score or time in business. Business credit cards are another relatively easy form of financing to access, especially for smaller funding needs.

How much of a down payment do I need for a business loan?

Most small business loans do not require a down payment. Term loans, lines of credit, and revenue-based financing typically provide the full requested amount without an upfront payment. SBA loans may require a down payment of 10% to 20% for certain programs, particularly SBA 504 loans used for real estate or large equipment purchases. Equipment financing may also require a down payment of 10% to 20%, depending on the lender and the age of the equipment.

Accounts receivable financing lets businesses turn unpaid customer invoices into immediate cash instead of waiting 30, 60, or 90 days for payment. It's a funding method where you either sell your invoices to a third party or use them as collateral for a loan.

This guide covers how AR financing works, the different types available, typical costs and requirements, and how to determine if it's right for your business. We'll also explore a newer approach with a B2B payment platform that eliminates slow payments at the source instead of financing around them. In fact, 55% of all B2B invoiced sales in the United States are overdue, with 81% of businesses reporting an increase in delayed payments. Business owners dedicate an average of 10% of their workday, roughly 4 to 8.5 days annually, chasing unpaid invoices.

What is Accounts Receivable Financing

Accounts receivable (AR) financing is a way for businesses to get cash from unpaid customer invoices instead of waiting weeks or months for payment. You can either sell your invoices at a discount to a financing company (called factoring) or use them as collateral for a loan or line of credit (called invoice discounting or asset-based lending). Either way, you're converting future payments into money you can use today.

Here's the situation AR financing solves: You've delivered products or completed services for a customer, but their payment terms say you won't see that money for 30, 60, or even 90 days. Meanwhile, you have payroll to cover, inventory to purchase, or a growth opportunity you don't want to miss. AR financing bridges that gap by unlocking the value sitting in your unpaid invoices.

What makes AR financing different from a traditional bank loan? The approval process focuses primarily on your customers' creditworthiness rather than your own business credit history. A financing company cares more about whether your customers pay their bills on time than whether your business has been operating for five years or five months.

Types of Accounts Receivable Financing

AR financing isn't one-size-fits-all. The right option depends on how much control you want to keep over your invoices and customer relationships.

Invoice Factoring

Invoice factoring means selling your unpaid invoices to a third party called a "factor." The factor pays you an advance, typically 80-90% of the invoice value, right away. When your customer pays the invoice, you receive the remaining balance minus the factor's fees.

The factor takes over collections, which means they'll communicate directly with your customers about payment. Some business owners appreciate the hands-off approach since chasing payments takes time and energy. Others prefer to keep their financing arrangements private, which factoring doesn't allow.

Accounts Receivable Loans

An AR loan lets you borrow money using your invoices as collateral, but you keep ownership of those invoices. You're still responsible for collecting payments from your customers, and they typically never know you've secured financing against what they owe you.

The trade-off is straightforward: you maintain control and confidentiality, but you're on the hook for repaying the loan whether or not your customers pay on time. If a customer pays late or defaults, that's your problem to solve.

Selective Receivables Financing

Sometimes you don't want to finance all your invoices, just a few specific ones. Selective receivables financing gives you that flexibility. Maybe you have one large invoice creating a cash flow crunch, or perhaps you only want to finance invoices from certain customers. This approach lets you pick and choose without committing to a broader arrangement.

Accounts Receivable Loan vs Invoice Factoring

The choice between an AR loan and invoice factoring often comes down to two questions: Do you want to handle collections yourself? And do you want your customers to know about your financing arrangement?

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How Does Accounts Receivable Financing Work

While the details vary depending on whether you choose factoring or a loan, most AR financing follows a predictable sequence.

1. Submit Your Outstanding Invoices

First, you provide documentation of your unpaid invoices to the financing company. They'll review the creditworthiness of your customers, looking at payment histories and credit profiles. Your own business financials matter less than whether your customers reliably pay their bills.

2. Receive Your Cash Advance

Once approved, you receive an upfront percentage of the total invoice value. This percentage, called the "advance rate," typically ranges from 70-95% depending on your industry, invoice volume, and how creditworthy your customers appear. The remaining percentage is held in reserve.

3. Your Customer Pays the Invoice

When the invoice comes due, payment collection depends on your financing type. With factoring, your customer pays the factor directly. With an AR loan, you collect payment as usual and then repay the lender.

4. Final Settlement and Reconciliation

After your customer pays in full, you receive the reserve amount minus the financing company's fees. For factoring, the factor sends you the remaining balance. For AR loans, you repay the borrowed amount plus interest, and any reserve held is released back to you.

Benefits of AR Financing for Small Businesses

AR financing offers several advantages that traditional bank loans typically can't match.

• Speed: AR financing converts slow-paying receivables into cash within days. Traditional bank loans often take weeks or months to process and fund.
• Scalability: Unlike a fixed loan amount, AR financing grows with your sales. The more invoices you generate, the more financing becomes available. This works particularly well for seasonal businesses or companies experiencing rapid growth.
• Accessibility: Since approval depends primarily on your customers' creditworthiness, businesses with limited operating history or imperfect credit can often qualify. A two-year-old company with reliable, creditworthy customers may have an easier time getting AR financing than a traditional bank loan.
• No equity dilution: AR financing is debt-based, not equity-based. You access capital without giving up ownership in your business.

Limitations of Traditional AR Financing

AR financing solves immediate cash flow gaps, but it comes with trade-offs worth considering.

Your customers may find out. With factoring, your customers are notified that a third party now owns their invoice. Some businesses worry this signals financial distress, even when it doesn't.

You're still waiting on slow payers. AR financing doesn't change customer payment behavior—it just helps you work around it. You'll keep dealing with the same 45, 60, or 90-day cycles.

Fees reduce your margins. Factor rates of 1-5% per month add up, especially on invoices that take longer to collect. For businesses with thin margins, these costs can be hard to absorb.

It's reactive, not proactive. Traditional AR financing addresses the symptom (you need cash now) rather than the root cause (your customers have limited ways to pay).

Modern Alternatives to AR Financing

What if instead of financing your receivables after slow payments pile up, you could prevent the problem in the first place?

A newer category of B2B payment platforms takes this approach. Rather than selling invoices or borrowing against them, these platforms embed flexible payment options directly into your invoicing. Your customers choose how they want to pay (card, ACH, installments over 12 months, or net terms up to 24 months) and you get paid within days regardless of which option they pick.

Fundwell is one platform built specifically for this. When you send an invoice through Fundwell, your customer sees multiple payment options at checkout. They can pay immediately by card or bank transfer, split the payment into installments using Buy Now Pay Later, or select net terms if they need more time. You receive funds quickly no matter what they choose.

The results speak for themselves. One distributor who previously waited 45+ days for payment started getting paid the same week after enabling flexible payment options. A supplier sending thousands of invoices monthly saw a 47% increase in invoices getting paid after adding installment options. Customers who used to delay large orders started buying more because they could spread payments over time.

How it compares to traditional AR financing:

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See It in Action →

Accounts Receivable Financing Requirements

Eligibility criteria vary by lender, but most AR financing companies look for similar characteristics.

• B2B invoices: Most providers work with business-to-business invoices rather than consumer receivables. If you sell primarily to individual consumers, AR financing probably isn't the right fit.
• Creditworthy customers: Your customers' payment track records matter more than your own credit score. Financing companies want to see that the businesses owing you money actually pay their bills.
• Invoice documentation: You'll provide proof that goods were delivered or services completed. Invoices for work not yet finished typically don't qualify.
• Minimum thresholds: Some lenders set minimum requirements, often starting around $10,000-$25,000 in monthly receivables. Smaller invoice volumes may not be cost-effective for certain financing companies.
• Operating history: Requirements range from a few months to two years depending on the provider. Newer businesses can often qualify if their customers have strong credit profiles.

Accounts Receivable Financing Rates and Costs

Understanding the full cost structure helps you compare options accurately and avoid surprises down the road.

Factor Rates and Discount Fees

The primary cost is usually expressed as a factor rate, which is a percentage of the invoice value charged for the financing. Rates commonly range from 1-3% per month, though they vary based on invoice volume, customer creditworthiness, and payment terms.

Some providers use variable rates that increase the longer an invoice remains unpaid. For example, you might pay 1% for the first 30 days, then an additional 0.5% for each 10-day period after that. This structure incentivizes quick customer payment and can significantly increase costs if invoices go past due.

Service Fees and Additional Costs

Beyond the factor rate, other charges can add up:

• Origination fees: One-time costs for setting up the financing arrangement
• Monthly minimums: Fees charged if your financing volume falls below a required threshold
• ACH or wire fees: Charges for electronic fund transfers
• Early termination fees: Penalties for ending an agreement before the contract term expires

How to Compare AR Financing Companies

When evaluating providers, look beyond the headline rate. Calculate the total cost of financing including all fees, examine contract flexibility and length, ask about funding speed, and assess the quality of customer support. The best providers explain all potential costs upfront without you having to dig for information.

Tip: Request a complete fee schedule before signing any agreement. Reputable AR financing companies provide this information readily.

How to Apply for Accounts Receivable Financing

The application process has become increasingly streamlined, especially through online platforms that connect businesses with multiple funding options.

1. Gather Your Business and Invoice Documents

Before starting an application, collect your accounts receivable aging report, sample invoices, basic business financials, and information about your major customers. Having these documents ready speeds up the process considerably.

2. Submit Your Online Application

Most applications take just a few minutes to complete. You'll provide basic information about your business, industry, and financing needs.

If you're exploring AR financing options, Fundwell can help you compare offers from multiple providers. But if you'd rather solve the slow-payment problem at its source—by giving your customers flexible ways to pay—Fundwell's B2B payment platform offers a different path.

Compare Financing Options or Explore Fundwell's Payment Platform

3. Review and Compare Funding Offers

You may receive multiple offers with different terms, advance rates, and fee structures. Take time to compare the total costs rather than focusing only on the advance rate. A higher advance rate with higher fees might cost more overall than a lower advance rate with minimal fees.

4. Accept Your Offer and Get Funded

After finalizing paperwork, funding can happen quickly. Many businesses receive funds within 24-72 hours of approval, which is significantly faster than traditional bank financing.

Is Accounts Receivable Financing Right for Your Business

AR financing works well in certain situations but isn't the right fit for every business. Businesses that automate AR processes save an average of 23 days on their Days Sales Outstanding, and AR teams can process functions 87% faster with automation.

You're likely a good candidate if you sell to other businesses with reliable payment histories, if long payment terms like net 30, 60, or 90 create cash flow gaps, if you want working capital faster than traditional loans provide, or if you prefer to fund growth without taking on conventional debt or giving up equity.

On the other hand, AR financing may not work well if your customers have poor payment histories, if your profit margins are too thin to absorb financing costs, or if you primarily sell to individual consumers rather than businesses. The fees associated with AR financing eat into your margins, so businesses operating on very tight margins may find the cost outweighs the benefit.

FAQs About Accounts Receivable Financing

What industries commonly use accounts receivable financing?

AR financing is popular in industries with long payment cycles. Staffing agencies, manufacturers, wholesale distributors, transportation companies, construction firms, and government contractors frequently use AR financing because their customers often take 30-90 days to pay invoices.

Will customers know when a business uses accounts receivable financing?

It depends on the financing type. With invoice factoring, customers are typically notified because the factor collects payment directly and becomes the point of contact for invoice-related questions. With AR loans, the arrangement usually remains confidential since you maintain collection responsibilities and customer communication.

What is the difference between recourse and non-recourse factoring?

With recourse factoring, you're responsible for repaying the advance if your customer fails to pay the invoice. The factor can "recourse" back to you for the money. Non-recourse factoring means the factor assumes the credit risk of non-payment, though this protection typically only covers specific situations like customer bankruptcy, not payment disputes or other issues. Non-recourse arrangements usually cost more because the factor is taking on additional risk.

How is accounts receivable financing treated in accounting?

The accounting treatment depends on the financing type. Factoring is typically recorded as a sale of assets since you're selling the invoices to another party. AR loans appear as liabilities on your balance sheet since you're borrowing money with invoices as collateral. The distinction matters for financial reporting and can affect how lenders and investors view your business finances.

What happens if a customer disputes a financed invoice?

If a customer disputes a financed invoice, you'll typically work with the financing company to resolve the issue. The disputed amount may be deducted from future advances or held in reserve until the matter is settled. Most financing agreements include provisions for handling disputes, so understanding these terms before signing is helpful.

Are there alternatives to traditional accounts receivable financing?

Yes. B2B payment platforms like Fundwell take a different approach by embedding flexible payment options—card, ACH, installments, net terms—directly into your invoices. Instead of financing receivables after they become slow to collect, you prevent the problem by giving customers more ways to pay upfront. You get paid within days, and your customers get the flexibility they need.