What Working Capital Options Are There for Small Businesses?

small business working capital during covid

Small businesses have historically turned to banks to get the funding they need, but traditional funding is expensive, and it’s always been tough to get approval. In the throes of COVID-19, approval rates further plummeted to a mere 11.5 percent, according to the Small Business Lending Index. No doubt, a result of the increasing difficulties small businesses face trying to keep their doors open amid a pandemic and make good on their payments.

As one of the most economically challenging years on record comes to a close, and small-business owners look to the future, many seek reliable working capital solutions. Below, we’ll explore what’s out there and which solutions are most viable for those persevering through the pandemic and its aftermath.

Alternative Loans vs. Traditional Loans for Small Business

There are distinct differences between alternative business loans and traditional loans offered by banks. Whereas the banks have gravitated toward federal programs and have a slew of guidelines they must follow to participate, alternative programs have been able to maintain their community focus by eschewing them. That in mind, alternative business loans are a great option when banks fall short.

Borrower Requirements

Banks have rigid borrower requirements. In short, banks are incredibly risk averse, and they often work with SBA loans. It’s hard to qualify for an SBA loan to begin with, but if a borrower defaults on one, the SBA picks up most of the outstanding balance, so the bank isn’t on the hook. Generally speaking, they’re not eager to lend cash unless they’ve got an assurance like that or you’re solid on paper; have a good credit score, have steady cashflow, are making strong profits, etc. Many small businesses simply can’t meet the criteria, and even those which did prior to COVID-19 struggle today.

Alternative business loans typically have reduced borrower requirements. Alternative funding options rose to popularity because of the obvious gap banks leave behind. There are solutions for virtually every stage of growth, whether you’re still building credit, experience revenue hiccups, or receive payments inconsistently.

Speed of Funding

It can take weeks or months to get bank funding. There are lots of regulatory hoops to jump through when you get traditional lending. Suffice it to say, even an SBA Express Loan can take 30-60 days to pay out, while more standard options typically fall in the realm of 60-90 days.

Funding is generally faster with alternative lending. Each lender and program is different, but there are alternative lenders that can deposit funds in your account the same day you’re approved. It’s quite common for a small-business owner to complete the entire process and have their cash in less than a week.

Types of Alternative Business Loans

Because traditional lending leaves small businesses underserved for lots of reasons, there is all sorts of different types of alternative lending options to help fill the gaps.

Business Term Loans

The business term loan is what comes to mind when most people think of a loan, even if they don’t know the proper term. In short, a lender provides a lump sum for a specified period of time and the borrower pays it back in installments with interest. Criteria for qualifying for business term loans is rigid. You’ll typically need excellent credit, steady cash flow, and to meet other requirements unless you’re using collateral.

Lines of Credit

Just like credit cards, lines of credit are accounts with a predetermined limit that borrowers can draw upon. When the account has a balance, the borrower must make regular payments toward it. Requirements for qualifying are similar to a business term loan.

Invoice Factoring

Although technically not a loan, invoice factoring allows B2B companies to sell their invoices to a third party, known as a factor or factoring company. The factoring company gives the business a lump sum payment that covers most of the invoice, then collects from the company being invoiced, and then sends the remaining payment, minus a nominal service fee, to the business. It’s easier to qualify for factoring because the invoice serves as collateral and instant funding is sometimes an option.

Merchant Cash Advances

Also known as MCAs, merchant cash advances are typically used by companies that accept credit card payments. The lender, typically the company processing the credit card payments, looks into how much the business earns in credit card payments and establishes a loan amount based on the income. Rather than the business making payments to the lender, the lender deducts a portion of income from future sales to cover the interest, fees, and balance. Some MCAs work like term loans, where the borrower receives a single lump some, while others work like lines of credit and the borrower can draw from their available limit. Because the payments serve as collateral, it’s usually easier to get approved for an MCA but it’s common for borrowers to pay 20 to 30 percent for the privilege.


Sometimes referred to as P2P, peer-to-peer lending allows individuals and groups of people to fund a loan. With today’s modern P2P platforms, individual contributions can range from a few dollars each to well into the thousands and, although these are typically everyday people, more often than not, they’re looking for proof that they’ll get their cash back with interest just like the banks would. Sometimes the platforms set the exact same criteria banks use too. That in mind, it’s not always easier to get a P2P loan than it is to get one from a bank.


Often confused with peer-to-peer lending, crowdfunding gives the investors an equity stake in the company. Although you don’t have to pay the investors back, they retain their stake indefinitely, meaning they will earn income from your business for as long as it’s producing income. An example of this is Kickstarter. Although the requirements aren’t as stringent as a bank’s, the business owner must essentially dazzle investors enough to get their buy-in and build relationships to encourage contributions.

SBA Loans

Small Business Association (SBA) loans actually come from a bank, just like other traditional lending solutions do. That means they’re not really alternative loans, but they’re widely misunderstood, so we’ll cover them here. With an SBA loan, the SBA agrees to pay back most of the loan if the borrower defaults. This gets banks to agree to lend more often because there’s less risk for them. However, the criteria for approval is very close to what you might find from a traditional bank loan. A new business, or one with bad credit, is going to have a hard time getting an SBA loan.

Equipment Loans

With equipment loans, the item you purchase is used as collateral, so it’s sometimes easier to get approved. If you need tires for your truck, machines for manufacturing, office items like computers or printers, an oven for your bakery, or similar equipment required to operate, an equipment loan may be ideal. However, you will typically need to pay at least 20 percent of the cost of the item and meet other eligibility criteria.

Best Working Capital Financing Options for Small-Business Owners

Coming out of 2020 and throughout 2021, small-business owners are likely to become even more reliant on alternative lending to get working capital than they have in the past. A few of the best working capital financing options for small-business owners are outlined below.

Kabbage: Most Convenient

Specializing in small business solutions, Kabbage provides fast funding and helps small-business owners with bad credit. Although the APR is on the high side, ranging from 24 to 99 percent, the minimum required credit score is just 560 and they can finance up to $250,000 in a matter of days.

Funding Circle: Best for P2P Loans

Offering some of the most competitive rates among online lenders, Funding Circle is a solid P2P choice. APRs range from 12.18 to 36 percent, there’s no minimum revenue requirement, and you can get cash in as little as three business days. However, you will have to have a minimum credit score of 660, plus their process requires a business lien and personal guarantee.

Kiva: Best for Microloans

The non-profit crowdfunding platform Kiva offers interest-free loans of $1,000 to $10,000. It relies on the premise that everyday people will read your personal story and want to fund your loan, with each person providing $25. In the background, Kiva actually works with larger lenders and full underwriting teams who fund the loans in a more traditional manner. However, the lenders are more willing to loan because some of their risk is mitigated by people chipping in.

Accion: Best for Startup Business Loans

The non-profit Accion provides microloans and general small-business loans ranging from $200 to $750,000 and pair it with counseling and mentoring to make entrepreneurs more successful. Their goal is to help the most vulnerable groups succeed, and as such, they focus on lending to women, veterans, people with disabilities, Native Americans and other minority business owners. The minimum credit score starts at 575 and APR ranges from 7 to 34 percent for most loans.

OnDeck: Best for Repeat Borrowing

If you have a credit score of at least 600, OnDeck may be able to get you cash on the day you apply. However, the company has a fixed-fee structure, which means you won’t save anything by paying the loan off early and APRs can range from 9 to 99 percent.

StreetShares: Best Balance of Rates/Requirements

Businesses that don’t usually qualify for loans due to limited time in business or low revenue may have better luck with StreetShares. With a minimum credit score of 600, borrowers can qualify for as much as 20 percent of their annual revenue and get an APR somewhere between 8.00 and 39.99 percent.

Charter Capital: Best for B2B Companies with Invoices

Offering invoice factoring for a wide range of industries, Charter Capital provides same-day funding without taking on a loan that needs to be repaid. Because factoring relies on the creditworthiness of the customer paying the invoice, even businesses without good credit can qualify and there’s no long-term contracts.

What Are the Uses of Alternative Loans?

Alternative loans can be used the same way traditional loans can, though some are set up to help with specific needs.

  • Payroll
  • Equipment
  • Real Estate and Expansion
  • Inventory
  • Vendor Payments
  • Working Capital
  • And More

How to Obtain Alternative Financing

Getting started with alternative financing is easier than you might think.

1) Find out which types of alternative financing are right for you. Use the list on this page to get a better feel for which types work best for various needs and what options are likely to deliver the best value.

2) Talk to various lenders. See if they will provide you with a free estimate or rate quote, but be wary of companies that do hard credit checks in order to do this. Whereas a soft check won’t harm your credit score, it can be difficult to get approval for a loan if you have recent hard inquiries.

3) Ask for it in writing. Look over your contract and their proposed rates to ensure everything is in order. Watch for hidden fees and penalties. Try to find options you can pay off early or that don’t require contracts.

4) Get advice if you need it. Use resources like the BBB and review sites to see what experience others have had with a lender. Talk to other business owners who have had needs similar to yours and have gotten alternative financing.

5) Compare your options. When you have a group of lenders and packages, compare them together and see which one is right for you.

Explore Invoice Factoring with Charter Capital

If getting an instant cash injection without taking on a loan sounds ideal for your situation and you invoice other businesses, get a free factoring rate quote from Charter Capital.

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