Securing working capital can open doors for your business to bridge a slow season, invest in new inventory, or hire additional staff. But it’s not as simple as turning the knob. You have hundreds of financing providers and products to choose from. And your decision can impact your operations for months or even years.
So, how do you begin to compare working capital loans and lenders? How do you distinguish between the helpful and the harmful? Start by asking these seven questions.
1. What Are the Total Borrowing Costs?
Many lenders promote an “interest rate” or “factor rate,” but those numbers are only part of the whole picture. For example, you could secure $10,000 through a six-month merchant cash advance (MCA) with a 2.5 factor rate. The borrowing cost may seem low compared to a 6.5% interest rate on a short-term loan, but to compare costs effectively, you need to convert both numbers to Annual Percentage Rates (APRs). The MCA has an approximately 300% APR, while the loan has an APR of about 18%.
Total borrowing costs mean more than factors or interest rates. Request a detailed breakdown of fees, penalties, and origination costs. And pay attention to how the repayment structure affects the total repayment amount. You could end up owing in some circumstances.
The higher borrowing costs on MCAs and daily repayments are worth it for some businesses. But you deserve to know exactly how much your loan will cost, and be able to compare it to other financing options.
2. How Flexible Is the Repayment Structure?
A one-size-fits-all repayment schedule can quickly become a burden if your business has seasonal fluctuations or inconsistent cash flow. Ask what repayment options the lender offers, including the term lengths and early repayment.
For example, the best business loan providers for auto repair shops use flexible repayment structures to allow you to repay a portion of what you earn in real time using automatic bank drafts. They match the loan’s term to your investment and incentivize early pay-off.
You want a repayment structure that allows you to maximize repayments during a business boom and makes it easier to manage payments in the lean weeks.
3. How Long Is the Approval and Funding Process?
When you’re facing an unexpected expense or a time-sensitive growth opportunity, you can’t wait weeks for traditional banks to approve a loan. Likewise, you probably don’t have several hours to fill out an application. Learn about the approval and funding process, including the average timeline.
Many fintech lenders use secure connections to your business software to evaluate real-time sales data. You can apply online in a few minutes, receive a decision in a few hours, and secure funds within a few days.
Speed may or may not be the most critical factor for your business. However, you can avoid frustration or worse by knowing whether a lender offers fast business loans.
4. Do They Support You After You’re Funded?
Customer service matters, especially if your business model evolves during the loan term. You want a lender who can adapt to your needs, answer questions promptly, and provide clear insights into your repayment progress.
Look for lenders that offer client dashboards, real-time repayment tracking, and proactive check-ins. These tools help you stay in control and prevent surprises. Avoid lenders who make it hard to speak to a real person or who rely solely on email support.
You deserve a financing partner who you can turn to during the life of the loan, not one who disappears as soon as your funds hit your account.
5. Are They Transparent About Terms and Conditions?
A loan impacts your business now and in the future. You deserve clarity about what you’re agreeing to before you sign. Reputable lenders use transparency to build trust.
Start with funding companies who provide key information about their loan products up front. Good lenders make this information easy to understand and welcome questions. Ask for a plain-language explanation of the repayment schedule, interest rates (or factors), and the consequences of late payments. It’s a red flag if a provider dances around terms, buries key fees in fine print, or avoids direct answers.
6. Do They Understand Your Industry?
Not every lender knows the unique cash flow realities of your business. A working capital loan company that focuses on MCAs for e-commerce companies might be too specialized. At the same time, a generic business line of credit provider may not offer enough customization for your business.
Ask what types of businesses they typically fund and whether the lender has experience with your industry. Look for customer reviews from businesses similar to yours that have worked with the loan company. Some platforms even tailor approvals based on industry benchmarks and revenue cycles.
Experts in your industry have the knowledge and products you need for a successful funding process. Regardless of who you work with, your lender should make the financing experience smooth and align the loan closely with your operational needs.
7. What Happens If My Sales Slow Down?
Every business hits speed bumps. Ask your lender about the support available if your revenue drops and you need temporary relief. Use questions like:
- How do you handle a missed payment?
- Can you restructure the loan?
- Do you defer payments?
- Can you pause repayments altogether?
These questions reveal a lender’s flexibility and commitment to your long-term success.
You don’t want an inflexible loan agreement with harsh penalties that force you into financial straits. Look for loan companies that offer support and built-in wiggle room for when business isn’t booming.
Look Through the Door
It’s tempting to grab the first “you’re approved!” email you receive, especially if you’re in a cash crunch. But it’s better to know what you’re walking into.
Take the time to ask these seven questions to avoid hidden fees, frustration, and predatory or restrictive terms. Find the working capital lender who opens the door to new growth opportunities.