“Money won is twice as sweet as money earned.”
— “Fast Eddie” Felson, The Color of Money (1986)
Welcome to Part 2 of our series on revenue-based financing (RBF). Today, we’re diving into one of the most popular options in the RBF world: working capital loans. With the digitization of financial services, working capital loans have exploded in availability and now represent a significant portion of the non-bank working capital market for small and medium-sized businesses (SMBs) in the United States.
In this post, we’ll explore working capital loans from two main categories of providers: pure lenders and embedded lenders. Each offers unique advantages and drawbacks, so let’s explore which might best meet your needs.
Working Capital Loans: Pure Lenders vs. Embedded Lenders
Pure Lenders
Let’s start with pure lenders—companies that focus solely on providing SMB financing through revenue-based working capital loans. Unlike embedded lenders, pure lenders operate independently, specializing in small business funding without relying on other income streams. Some of the top players in this category include:
• OnDeck
• Kapitus
• Credibly
• Libertas
These lenders have been cornerstones in the online financing world, offering a range of working capital solutions tailored to SMBs. While each lender has its own nuances, here’s a general overview of their typical loan attributes:
• Loan Sizes: $5,000 to $2,000,000, depending on your business’s needs and qualifications.
• Term Length: Ranges from 3 to 36 months, with an average term of 9 to 18 months.
• Rate Factors: Typically from 1.05 to 1.40, often influenced by the loan term length.
• Payment Frequency: Payments are commonly scheduled daily, weekly, or biweekly, with weekly payments being the most popular.
Sample Offer:
• Loan Amount: $100,000
• Rate Factor: 1.20
• Total Repayment: $120,000
• Term Length: 12 Months (52 weeks)
• Payment Frequency: Weekly
• Payment Amount: $120,000 total repayment / 52 weeks = $2,307.69 per week
This example illustrates a typical repayment structure. With a rate factor of 1.20, the borrower will repay a total of $120,000 on a $100,000 loan over a 12-month period. The weekly payment of $2,307.69 allows for predictable cash flow planning while meeting the lender’s structured repayment schedule.
These lenders are often referred to as “A-Paper” or “1st-Position” lenders within the industry. They represent the most affordable options among online SMB working capital loans, but they’re also selective—focusing on well-qualified businesses with solid cash flow and credit history. We’ll delve more into these “A-Paper” lenders in a future post, but for now, know that these lenders offer lower costs in exchange for stricter approval criteria.
It is our strongly held judgment that there is NO REASON to get an offer from an A-Paper/1st-Position lender through a broker. Seriously, why pay more? A broker would have taken this already expensive loan with a total repayment of $120,000 and jacked it up to $128,000–$130,000 or more, likely increasing your payment, too. And for what? What value are they providing that’s remotely worth that? Brokers thrive on you not knowing the things we’re breaking down here at BrokerFreeCapital.ai every day, so they charge fees like that. Let’s cut out the middleman.
Embedded Lenders
Next up, we have embedded lenders—a newer category of financing providers whose products are integrated directly into payment flows or business software platforms that SMBs use every day. These lenders provide working capital solutions within the context of existing customer relationships, typically with more streamlined application processes.
Some well-known embedded lenders that operate within payment processing systems include:
• Square Loans
• Stripe Capital
• PayPal Business Loans
Others are embedded in specialized software platforms for specific industries:
• Clover Capital
• Toast Capital
• Shopify Capital
By embedding their financing options directly into payment systems or software, these companies can assess your transaction history and performance data to quickly offer working capital solutions. Here’s a general overview of the attributes of financing from embedded lenders:
• Loan Sizes: Typically between $5,000 and $500,000.
• Term Length: Generally 3 to 12 months, often shorter than terms from pure lenders.
• Rate Factors: Usually from 1.05 to 1.20, which is lower than what many pure lenders offer.
• Payment Structure: Payments are often structured as a fixed dollar amount or a fixed percentage of daily sales.
• Payment Frequency: Primarily daily or weekly payments.
Sample Offer:
• Loan Amount: $100,000
• Rate Factor: 1.08
• Total Repayment: $108,000
• Payment Frequency: Daily
• Payment Amount: 17% of daily credit card sales
Note: Unlike traditional loans, no specific term length can be stated or predicted here. However, embedded lenders typically aim for a repayment period within 3 to 12 months and may adjust the holdback percentage on your daily sales to meet that target. This flexible approach allows repayments to vary with sales, making it easier to manage cash flow during slower periods.
Embedded lenders are relatively new players in the financing world, and they’re gaining ground fast. Unlike pure lenders, these companies have already acquired their customers through payment processing or software services. This approach allows embedded lenders to offer a more streamlined financing experience while leveraging existing customer relationships. As a result, embedded lending is a rapidly evolving market, with more options coming to the fore every year.
Pure Lenders and Embedded Lenders – What Do They Have in Common?
Though they operate differently, pure lenders and embedded lenders share a few key attributes that make them attractive for SMBs needing quick working capital. Here are some commonalities on both the positive and negative sides.
The Positives:
1. Easier to Qualify For Than Traditional Bank Financing
Both pure and embedded lenders approve SMBs that traditional banks often won’t consider due to limited operating history, low collateral, or credit issues.
2. Much Faster Funding Process
If speed is crucial, both types of lenders can deliver funds in as little as 1–5 business days. This quick turnaround is essential if you need to stabilize cash flow or jump on an opportunity.
The Negatives:
1. Higher Cost of Capital Compared to Banks
Even the most affordable loans from these lenders will be more expensive than a traditional bank loan, which comes with more favorable rates—assuming you qualify.
2. Shorter Terms Than Bank Loans
Bank loans for working capital often offer 3- to 10-year terms, creating lower monthly payments. In contrast, these online lenders typically max out at 3–36 months, meaning higher payment amounts even for the same loan size.
Which Option is Right for You?
The best option depends on your business’s specific needs and financial circumstances. Here’s a breakdown of why you might choose one over the other.
Reasons to Go with a Pure Lender:
1. Diversified Revenue Streams
If your revenue comes from various sources, such as B2B invoices and credit card transactions, a pure lender might be more flexible since they’ll evaluate your full cash flow rather than just one type of income.
2. Potentially Longer Terms
Pure lenders generally offer slightly longer terms, which can provide more manageable payments over time.
3. Higher Dollar Amounts
If you need a larger sum of capital, pure lenders may provide higher loan amounts than embedded lenders.
4. Predictability of Fixed Payment Amounts
Fixed payment structures from pure lenders make it easier to plan your cash flow, with consistent amounts due over the loan term.
5. A More “Human” Touch
Pure lenders earn their revenue exclusively through repayment, so their success depends on yours. Unlike embedded lenders who already make money off your transactions or SaaS fees, pure lenders rely entirely on loan repayment. This sometimes leads to a more personalized underwriting approach, where an experienced team might take the time to understand your unique circumstances.
Reasons to Go with an Embedded Lender:
1. Lower Cost of Capital
Embedded lenders often offer lower costs because they’ve already spent the money to acquire you as a customer through their software or payment processing. In contrast, pure lenders have to spend significantly on marketing or pay brokers to bring in customers, costs often passed on to borrowers. As a result, embedded lenders often provide more cost-effective financing.
2. No Personal Credit Check
Many embedded lenders focus on the performance of your business with their platform rather than personal credit, which can be an advantage if your credit isn’t perfect.
3. Easier on Cash Flow
Repayment structures based on a percentage of sales can make payments more manageable when your revenue fluctuates. If your sales dip, your payments will adjust, making cash flow easier to control during slower periods.
Conclusion: Pure vs. Embedded Lenders—Which is Right for You?
Pure and embedded lenders each bring unique advantages to the table, providing faster, more accessible working capital than traditional bank loans. Pure lenders are often the better choice if you need larger amounts, a predictable repayment schedule, or a more tailored, human approach. On the other hand, embedded lenders offer flexibility in cash flow alignment and a generally lower cost of capital, especially if you’re already using their platform’s services.
The goal here at BrokerFreeCapital and with Diogenes as your guide is to empower you to make these decisions confidently—without a broker jacking up your costs. We want you to know how to get the best financing available on your own terms. By understanding the strengths and limitations of each option, you’re already ahead of the game and, crucially, much less reliant on brokers who are all too eager to add extra fees at every turn.
What’s Next: Part 3 – Lines of Credit from Online Providers
Stay tuned for Part 3 in our series, where we’ll cover another powerful tool in the small business funding toolkit: lines of credit from online providers. We’ll dive into what sets lines of credit apart from working capital loans, who they’re ideal for, and how to navigate this flexible, revolving financing option with confidence—because cutting out the middleman is always the smart move.
Other Posts In This Series
Revenue-Based Financing Part 1: An Intro to the Dominant Form of Online SMB Funding
Revenue-Based Financing Part 2: Fintech Working Capital Loans
Revenue-Based Financing Part 3: Fintech Lines of Credit
Revenue-Based Financing Part 4: How Your Small Business Is Underwritten
Revenue-Based Financing Part 5: Stackers/2nd Position+ Revenue-Based Funders
Revenue-Based Financing Part 6: Tips For Applying For A Revenue-Based Loan