7 Types of Startup Working Capital Every Founder Should Know

If you want to grow, you need working capital. Working capital, the immediate cash you use for day-to-day operations, is necessary for everything from paying your staff to vendor invoices to investing in hardware.

As a founder, you know your net working capital like the back of your hand. Instead of counting sheep, you’re subtracting your current liabilities from your current assets. But the road to growth is full of obstacles, and even the startups with the strongest working capital management will face at least one situation where they have to deal with negative working capital. The worst time to start asking what your working capital financing options are is when your current liabilities are greater than your current assets. So let’s get to know your top options now. 

Here are the 8 sources for extra working capital that every startup founder should know. And if you’re tight on time, bookmark this page for future reference. 

Knowing If Working Capital Financing Is Right for You

Before you begin pursuing any type of business funding, make sure you know: 

• How much money you need (What’s your burn rate? Are there any big purchases or investments you need to make with this capital?)
• How much you can afford (What’s your working capital ratio?)
• Whether you’re willing to give up equity
• What collateral you might be able to secure more favorable financing (current assets, revenue, etc)

1. Venture Debt

Venture debt is a form of financing, similar to a bank loan, that’s designed for venture-backed startups. Venture debt can be in the form of a term loan or a line of credit, and typically comes with repayment terms between 24 and 48 months. If venture debt were a person, it would be the blazer-clad classmate from business school who’s probably going to ask for a seat on your board. 

For venture capital-backed startups, venture debt can come in handy at critical points during the growth journey. You can use it for an up-front cash infusion, allowing you to hire the army of engineers you need to beat the competition to market with your latest innovation in AI. Or, more flexible venture debt financing (in the case of a line of credit) might help you expand globally, giving you the capital to fund localized sales, marketing, and regulatory adaptation. 

you might want financing flexibility (with a line of credit) if you’re looking to expand from one country into another. 

Venture debt is financed through lenders and banks that specialize in startup financing. It differs from a traditional business loan because it doesn’t use hard assets as collateral. Instead, venture debt typically includes warrants for company stock, giving the lender the ability to purchase company stock at a set price over a specified period.

The drawbacks: You may need to give up equity because of warrants, making venture debt a potentially dilutive source of working capital. Venture debt can also come with restrictions. For example, venture debt cannot be used for specific projects like equipment financing or acquisitions. 

2. Revenue-Based Financing

Revenue-based financing is a type of business financing where startups borrow money upfront in exchange for a percentage of future revenue until the loan amount is repaid. Revenue-based financing is similar to a traditional business loan in that you receive the lump sum loan amount upfront, and it doesn’t require you to give up any equity. 

Because so many SaaS and AI startups operate on rolling subscription models, revenue-based financing has become an increasingly popular way to finance growth. From giving you the runway you need to extend “freemium” subscriptions and trial periods (so you can convert more free users to paid subscribers) to giving you the capital to hire contractors from product sprints (without needing to hire full-time staff), revenue-based financing can help…and it doesn’t require you to give up any equity. 

Think of revenue-based financing a bit like ice cream…or Beyoncé, it’s popular because there’s a lot to love. 

3. Equity Financing

Equity financing gives a startup capital in exchange for shares of the company. Most tech startups will pursue some kind of equity financing—whether it be via a venture capital firm, friends and family, angel investors, business incubators, etc. The appeal is that it gives you access to working capital that you don’t have to repay, which can be a lifesaver for startups that need to survive the cash burn of GTM or even later-stage growth. 

It’s important to know that it’s an option… but it’s not your only option. If you seek equity financing every time you need an infusion of working capital, you’ll likely end up so diluted that you’re basically an employee working for someone else. That’s why even the founders who bullishly pursue equity financing will often diversify their debt with non-dilutive financing. 

4. Bank Loans

A bank loan gives you an initial amount of capital upfront that is repaid at regular increments over a set period. Traditional bank loans typically come with some of the most favorable interest rates (as far as business financing goes), and they don’t require you to give up any equity. So what’s the rub? It’s harder for newer businesses to qualify for a business loan at a bank. Bank loans can take a long time to obtain, and they require high financial performance (for example, they may require cash flow positivity). 

When you might want to use a bank loan: You’re an AI company looking to purchase on-premise GPU servers might use a secured equipment loan, using the hardware as collateral. You’re not in a rush, and you like the attractive interest rates. You’re a SaaS startup that’s become profitable, and you’re looking to refinance existing venture debt (that came with double-digit interest rates and warrants). 

5. Short Term Loan

A short term loan is designed to give your business quick access to capital. Repayment terms are typically shorter than a year (often between 3 and 12 months). A short term loan can get you out of a pinch to help you cover emergency expenses, working capital, or capitalize on a time-pressing business opportunity. The drawback of a short term loan is that the interest rates tend to be high, making it a pretty expensive financing option. 

Think of a short-term loan like a fire extinguisher for your business. In an emergency, it cansave the day. But you might be left with a bit of a mess to clean up afterwards, so only use it when you need it. 

6. Business Credit Cards

Credit cards can be an effective, short-term way to manage working capital. Because credit card debt typically comes with a higher interest rate, carrying a balance isn’t typically a prudent financial move—even if it gives your startup access to quick cash. The one exception here is that some business cards offer 0% introductory APR for 6 or 12 months, making them an option if you’re looking for a cash infusion to cover an equipment purchase, software, or other expansion. 

Of course, this type of working capital comes with limits. You typically can’t put payroll or office rent on a business credit card. And you want to be sure that you have a repayment plan before you start putting charges on a credit card. The last thing you want is to be saddled with high-interest repayments that could negatively affect your business credit score (which could limit your ability to secure more favorable financing in the future). 

7. Bootstrapping

You can also self-finance your working capital needs, a practice often referred to as bootstrapping. Startups that choose to grow through bootstrapping operate on a lean budget, reinvesting profits into the business to grow. The pro of bootstrapping is that you don’t have to give up equity or contend with the added cost of taking on debt (aka interest). The con is that it limits your budget and, in turn, may hinder your velocity. That’s why most SaaS and AI startups end up turning to one or more external financing options. 

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