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Working capital finance
Working capital is the cash a business needs to keep trading day to day: paying suppliers, staff and rent before customers pay you. When it runs short, profitable businesses can still struggle.
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Why the gap opens
Working capital is current assets (cash, stock, money owed to you) minus current liabilities (money you owe in the next year). The pressure comes from timing. You buy stock and pay wages now; your customer pays in 30, 60 or 90 days. Growth makes it worse, not better: every new order needs funding before it is paid for. That is why a business can be profitable on paper and still be unable to pay a supplier on Friday.
The ways to fund it
There is no single “working capital loan”. The phrase covers several products, and the right one depends on what is causing the gap.
- Slow-paying customers: invoice finance releases most of an invoice’s value when you raise it, and grows as your sales grow.
- Seasonal stock or a short-term peak: a short term loan or a revolving credit facility you draw and repay.
- Card-taking businesses with uneven sales: a merchant cash advance, repaid as a share of takings, flexes with the till, at a price.
- A one-off bill: a VAT loan or short loan for that purpose.
- Day-to-day swings: an overdraft, which you pay for only when you use it.
The table below sets out the general characteristics of each type side by side. It describes how the products are normally structured, not any particular lender’s terms.
| Type | Suits | Typical term | Security | How it is priced | Speed |
|---|---|---|---|---|---|
| Unsecured term loan | A one-off need with a clear payback | Usually 1 to 5 years | No specific asset; personal guarantee common | APR | Hours to days |
| Secured term loan | Larger or longer borrowing | Several years, longer for property | Charge over property or assets | APR or margin over base | Weeks |
| Start Up Loan (government-backed) | New businesses | 1 to 5 years (as published) | Unsecured, personal loan for business use | Fixed rate (as published) | Weeks |
| Asset finance (HP or lease) | Vehicles, machinery, equipment | Matched to the asset's working life | The asset itself | Often a flat rate; ask for the APR | Days |
| Invoice finance | Slow-paying business customers | Rolling facility | Your unpaid invoices | Service fee plus discount charge | Days to set up |
| Merchant cash advance | Card-taking businesses with uneven sales | Months, until the fixed total is repaid | None; repaid from card takings | Factor rate or fixed fee | Days |
| Commercial mortgage | Buying or refinancing premises | Long term, often decades | The property | Fixed or margin over base | Weeks to months |
| Business credit card | Everyday spending and cash flow | Revolving; interest-free days if paid in full | Unsecured; a personal guarantee may be asked of a limited company | Purchase rate and annual fee; representative APR | Days to weeks |
| Bridging loan | A short gap, often a property purchase | Months, rarely beyond two years | Property | Monthly rate plus fees | Days to weeks |
| Development finance | Ground-up builds and heavy conversions | The build period | The site and the scheme | Monthly rate, rolled up, plus fees | Weeks |
General characteristics of each type of finance, to help you choose the right comparison. They are not any lender’s terms; those are in the sourced tables on each page.
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Fix the gap before you finance it
Finance is a cost. Before borrowing, look at the cheap levers: invoice promptly and chase on the due date, offer a small early-payment discount where it is cheaper than finance, negotiate longer supplier terms, and hold less slow-moving stock. Whatever is left is the true working capital need, and that is the figure to finance.
Compare on total cost
Working capital products are priced in very different ways: APR on a loan, a service fee plus discount charge on invoice finance, a fixed factor rate on a merchant cash advance. Turn each offer into the total you will pay for the money and the time you will have it.
Frequently asked questions
What is a working capital loan?
A loan used to fund day-to-day running costs rather than a long-term asset. It is usually a short-term unsecured loan, though businesses also use overdrafts, revolving credit facilities and invoice finance for the same purpose.
How do I work out my working capital need?
Look at your cash-flow forecast for the lowest point in the cycle: the most you will have paid out before customers pay you. That shortfall, after any savings from better credit control, is the need.
Is invoice finance better than a loan for working capital?
If slow-paying customers are the cause, invoice finance often fits better because it grows with your sales and is repaid as invoices are paid. A loan is better for a defined one-off need.