Working capital options compared (2026): lines of credit, factoring and cash advances
Edited by Moe Ameen · Published
Working capital financing covers short-term needs like payroll and inventory. The main options are a business line of credit, a short-term loan, invoice factoring, a merchant cash advance and an SBA 7(a) loan. A line of credit charges interest only on what you draw. A merchant cash advance buys a share of your future sales and can be expensive, and the FTC has banned some providers from the industry.
Key takeaways
- A line of credit charges interest only on the part you use.
- Invoice factoring sells your unpaid invoices; invoice financing lets your customers keep paying you.
- The FTC has banned some merchant cash advance providers and won millions back for small businesses.
- Of the ten states we checked, only California and New York require an APR, on deals up to $500,000 and $2.5 million.
What are the main types of working capital financing?
A line of credit, a short-term loan, invoice factoring or financing, a merchant cash advance, and SBA 7(a) loans used for working capital.
- Line of credit: open indefinitely up to a set limit, and you pay interest only on what you use [1][2].
- Invoice factoring: you sell outstanding invoices to a lender for a percentage of what's owed [3].
- Invoice financing: like factoring, but your customers keep paying you instead of the lender [1].
- Merchant cash advance: a lump sum in exchange for a percentage of future sales, up to a ceiling [5].
- SBA 7(a): allows short- and long-term working capital, up to $5 million [4].
For SBA program details, see SBA loans explained.
What is a merchant cash advance?
A lump sum in exchange for a share of your future sales. The SBA notes it's fast and may skip a credit check, but fees can be expensive.
The CFPB defines it as an agreement where a small business gets a lump sum in exchange for a percentage of its future sales or income, up to a ceiling amount [5]. An SBA post says cash advances may not need a credit check and often pay out quickly, but the fees and interest can be expensive [2]. In the Federal Reserve's latest survey, 8% of employer firms applied for one [9].
What has the FTC done about merchant cash advance companies?
It sued several providers for deceiving small businesses. Yellowstone Capital paid $9.8 million, and two other companies and their owners were banned.
The FTC said Yellowstone withdrew money from businesses' accounts for days after they'd repaid in full; it settled for $9.8 million in April 2021 [6]. RAM Capital Funding and its owner were banned from the industry and paid $675,000 in January 2022 [7]. Richmond Capital Group and its owner were banned in June 2022, with more than $2.7 million returned [8].
Which kinds of lenders do small businesses rate best?
Credit unions and small banks, in the Fed's survey. Online lenders scored lowest on satisfaction, and 60% of their borrowers said costs ran higher than expected.
| Lender type | Got their full request | Satisfied |
|---|---|---|
| Credit union | 44% | 76% |
| Small bank | 57% | 65% |
| Large bank | 43% | 64% |
| Finance company | 50% | 57% |
| Online lender | 38% | 35% |
The report says high interest rates and unfavorable repayment terms were the most common challenges at online lenders, and 60% of online-lender borrowers said their costs were higher than expected [9].
Do lenders have to tell me what working capital financing costs?
In ten states we confirmed, yes, in some form. Only California and New York require an APR; the others require dollar costs or a finance charge.
The table below lists each law, the deal sizes it covers and whether it requires an APR. If your state isn't listed, ask the provider for the APR and the total repayment amount in writing before you sign.
Glisten check
State laws that require small business financing cost disclosures
| State | What it covers | Deal size covered | APR required? |
|---|---|---|---|
| California | Most commercial financing, including factoring and cash advances [10] | $500,000 or less [10] | Yes [10] |
| Connecticut | Sales-based financing [16] | $250,000 or less [16] | No; finance charge and total repayment [16] |
| Florida | Loans, open-end credit, receivables purchases [15] | $500,000 or less [15] | No; total dollar cost [15] |
| Georgia | Loans, open-end credit, receivables purchases [14] | $500,000 or less [14] | No; total dollar cost [14] |
| Kansas | Loans, receivables purchases, open-end credit [17] | $500,000 or less [17] | No; total dollar cost [17] |
| Missouri | Loans, receivables purchases, open-end credit [18] | $500,000 or less [18] | No; total dollar cost [18] |
| New York | Sales-based, loans, lines, factoring, leases [11] | Up to $2.5 million [20] | Yes, an estimated APR [11] |
| Texas | Sales-based financing [19] | Under $1 million [19] | No; finance charge [19] |
| Utah | Commercial financing, including receivables purchases [12] | $1 million or less [12] | No; total dollar cost [12] |
| Virginia | Sales-based financing [13] | $500,000 or less [13] | No; finance charge [13] |
The CFPB's revised small business lending data rule, issued May 1, 2026, also excludes merchant cash advances from the transactions lenders must report [5].
Is this right for you?
Best for
- Owners comparing short-term funding for payroll, inventory or slow-paying customers.
- Anyone offered a merchant cash advance and wanting to understand it first.
Not ideal for
- Buying real estate or long-life equipment. Long-term loans fit better; see SBA loans explained.
- Personal expenses. These products are for business use.
Frequently asked questions
Is a merchant cash advance a loan?
The CFPB describes it as buying a percentage of future sales up to a ceiling, not lending [5]. Several states still require cost disclosures for it [10][19].
What's the difference between invoice factoring and invoice financing?
With factoring, your customers pay the factor; with invoice financing, they keep paying you [1].
Is a line of credit cheaper than a merchant cash advance?
An SBA post calls a line of credit more economical than a term loan or merchant cash advance [1]. Compare the APRs of actual offers.
Which states require an APR on business financing?
California and New York, for deals up to $500,000 and $2.5 million respectively [10][20].
What credit score do working capital lenders want?
It varies widely. See funding with fair credit for published minimums.
How we know this
On October 28, 2026 we read the SBA's posts and program pages on working capital products, the CFPB's 2026 small business lending rule, the FTC's press releases on merchant cash advance cases, the Federal Reserve's 2026 Report on Employer Firms, and each listed state's statute, bill text or regulator page.
- 3 ways to get working capital for your business, SBA. Checked October 28, 2026.
- Where to find small business loans online, SBA. Checked October 28, 2026.
- 5 simple questions to help determine your business financing options, SBA. Checked October 28, 2026.
- 7(a) loans, SBA. Checked October 28, 2026.
- Small business lending rule, 2026 revisions (redline PDF), CFPB. Checked October 28, 2026.
- Cash advance firm to pay $9.8M to settle FTC complaint, FTC. Checked October 28, 2026.
- Merchant cash advance providers banned from industry, FTC. Checked October 28, 2026.
- FTC action results in ban for Richmond Capital and owner, FTC. Checked October 28, 2026.
- 2026 Report on Employer Firms, Federal Reserve Banks (Small Business Credit Survey). Checked October 28, 2026.
- Commercial financing disclosure regulations (press release, PDF), California DFPI. Checked October 28, 2026.
- Financial Services Law §803: Disclosures, New York State Senate. Checked October 28, 2026.
- Utah Code Title 7, Chapter 27 (PDF), Utah Legislature. Checked October 28, 2026.
- Code of Virginia §6.2-2231, Virginia Legislative Information System. Checked October 28, 2026.
- SB 90 (2023), signed, Office of the Governor of Georgia. Checked October 28, 2026.
- Florida Statutes §559.9612, Florida Senate. Checked October 28, 2026.
- Public Act 23-201 summary (PDF), Connecticut General Assembly. Checked October 28, 2026.
- SB 345, enrolled (PDF), Kansas Legislature. Checked October 28, 2026.
- RSMo 427.300, Missouri Revisor of Statutes. Checked October 28, 2026.
- HB 700, enrolled, Texas Legislature. Checked October 28, 2026.
- Financial Services Law §802: Exemptions, New York State Senate. Checked October 28, 2026.