Working capital finance
Struggling with cash flow? Need funding for seasonal peaks? Working capital finance could provide the cash your business needs to grow and thrive. Get a no-obligation quote today, with no impact on your credit score.
What is working capital finance?
Flexible funding
Working capital finance is flexible funding that helps your business manage day-to-day operational expenses and short-term cash flow gaps.
Working capital formula
Your working capital is calculated by subtracting your current liabilities (debts due within 12 months) from your current assets (cash, inventory and money owed to you).
A positive working capital means you have enough liquid assets to cover your short-term obligations, while negative working capital can indicate potential cash flow problems.
Why UK businesses need flexible finance options
More than two-thirds (69%) of SMEs claimed they needed external finance for “cash flow related” reasons, making working capital one of the most common business funding needs. Source: money.co.uk
Whether you’re turning over £500k or £20 million, unpredictable cash flow can affect businesses of all sizes.
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How working capital finance works
Working capital finance provides businesses with flexible funding that you can access when needed, pay interest on what you actually use and tailor to your cash flow needs.
Flexible access vs. fixed-term loans
Revolving facilities offer flexibility, while fixed-term working capital loans offer predictability and structure.
With working capital finance, the structure depends on the product. Revolving credit facilities (such as overdrafts) provide a pre-approved credit limit that you can draw from whenever you need to, and repay and redraw as needed. In contrast, a traditional working capital loan provides a lump sum upfront, with fixed repayment terms and schedules.
With revolving credit facilities and overdrafts, you can borrow, repay and borrow again within your credit limit. This gives you complete control over when and how much you access the financing.
Fixed-term working capital loans don’t allow you to redraw funds once repaid.
Interest calculations (pay only on what you use)
For revolving credit facilities and overdrafts, you only pay interest on the actual amount you’ve withdrawn, rather than on the entire credit facility. For example, if you have a £100,000 facility but only use £25,000, you’ll only pay interest on the £25,000. This can make working capital financing a cost-effective solution if your funding needs change throughout the year. For fixed-term loans, you pay interest on the full amount borrowed, regardless of how much you use.
Typical terms and repayment structures
Most working capital facilities are usually short-term, from a few months up to a year. But some lenders offer terms up to three years. Repayment frequency varies by lender and product, but monthly repayments are most common – some products may offer weekly or daily repayments, especially if your business has fluctuating cash flow.
Pros and cons of working capital finance
✔ Immediate cash flow
Working capital finance can provide funds in as little as 24-48 hours. The quick speed of funding can be used to unlock time-sensitive opportunities like securing bulk discounts, covering urgent supplier payments or bridging payroll when a large customer payment is delayed.
✔ Pay interest only on used funds
Unlike traditional loans where you pay interest on the full amount from day one, working capital facilities only charge interest on the amount you withdraw.
✔ No lengthy applications
Most working capital lenders can provide decisions within hours rather than the weeks (or even months) typical of traditional bank lending. This speed can be crucial for businesses with urgent opportunities or cash flow pressures.
✔ Seasonal business support
For businesses with seasonal variability, working capital finance provides flexibility to increase borrowing during peak periods and reduce it during quieter times. As well as supporting cash needs, this can help improve cash flow forecasting.
✔ Growth opportunity funding
Having access to working capital finance means you can take on larger contracts, buy more stock for expansion or invest in marketing campaigns without waiting for traditional loan approval.
✘ Higher interest rates than traditional loans
Working capital finance typically costs more than traditional business loans because it offers greater flexibility and faster access to funds. Rates can range from 8-50% APR depending on the product and your business profile, compared to 3-12% for traditional bank loans.
✘ Variable rates and potential fee increases
Many working capital facilities have variable interest rates that can increase when the Bank of England bank rate changes. Some lenders also reserve the right to adjust rates based on your business performance or market conditions.
✘ Facility withdrawal risks
Lenders can reduce or withdraw your credit facility, sometimes with little notice, particularly if your business circumstances change or you breach facility terms.
✘ Temptation to overborrow
Since it’s so easy to access the funds, this could lead to overuse, creating a cycle where you become dependent on borrowing rather than addressing underlying cash flow issues. Around 60% of SMEs fail due to cash flow problems, which can be exacerbated by unsustainable borrowing.
✘ What to watch out for in agreements
Be wary of agreements that have unclear fee structures, automatic renewals, cross-default clauses that could trigger other loan defaults or restrictions on other borrowing. And always make sure you understand the penalty charges for making late payments.
Estimate your costs today
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Calculations are indicative only and intended as a guide only. The figures calculated are not a statement of the actual repayments that will be charged on any actual loan and do not constitute a loan offer.
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Financial product information
Representative example*
• 7.63% APR Representative based on a loan of £50,000 repayable over 24 months.
• Monthly repayment of £2,252.94. The total amount payable is £54,070.56
*Some lenders may apply fees during the application process, please note that these are set and provided by these entities.
Annual Percentage Rates
Rates from 2.75% APR
Repayment period
1 month to 30 years terms
Is working capital finance right for your business?
Self-assessment checklist
£100k-£5m turnover: You might need working capital finance if you have seasonal sales, wait 30+ days for customer payments, need to purchase stock before busy periods or currently use personal funds for business expenses.
£5m+ turnover: You could need working capital finance if you’re comparing costs against existing credit lines, need faster access than traditional banking or want to diversify your sources of funding.
When it makes sense (with examples)
Working capital finance can make sense when you have temporary cash flow gaps rather than fundamental profitability issues.
For example, a £3 million catering business might need £150k for a large event contract, while a £15 million distribution company could use £800k to take advantage of bulk purchase discounts from suppliers.
When to consider alternatives
If your business consistently operates at a loss, traditional term loans might be cheaper for long-term investments like equipment or property.Companies with strong balance sheets might prefer to use their existing bank facilities. And those needing over £1 million might want to consider asset-based lending or mezzanine finance.
Red flags to look out for
Some lenders could end up costing you more than you expect. So consider avoiding lenders that offer guaranteed approval without proper assessment, unclear fee structures or upfront payments. Be particularly wary of costs exceeding 50% APR unless it’s for very short-term emergency funding.
Always make sure you understand the total borrowing costs including all fees.
Different types of working capital finance
Revolving credit facilities
Revolving credit facilities are like a business credit card but with higher limits (from tens of thousands to millions) and better rates.
You can borrow up to your approved limit, repay and borrow again throughout the facility term. They’re ideal for businesses with regular but unpredictable funding needs.
Business lines of credit
Business lines of credit provide you with ongoing access to funds with cash transfers, cheques or online banking. Unlike credit cards, they’re designed for larger business expenses like payroll, supplier payments or equipment purchases which offer more flexibility than traditional overdrafts.
Invoice finance and factoring
Invoice finance allows you to unlock up to 90% of your unpaid invoices immediately, rather than waiting 30-90 days for customers to pay. This can help smooth out your cash flow and provide working capital without requiring you to take on additional debt (you’re essentially accessing money already owed to your business).
Merchant cash advances
Merchant cash advances provide upfront funding in exchange for a percentage of your future card sales. Repayments are automatically deducted from your daily card transactions, making them suitable for businesses with consistent card sales like restaurants, retail shops, or service providers.
Purchase order financing
Purchase order financing helps you fulfill large orders when you lack the working capital to purchase inventory or materials upfront. The lender pays your supplier directly, and you repay once your customer pays for the completed order, enabling you to take on bigger contracts.
Flexible overdrafts
Modern business overdrafts offer more flexibility than traditional banking overdrafts, with higher limits, competitive rates and the ability to adjust your limit based on business performance. They’re perfect for covering short-term gaps between expenses and revenue.
Working capital finance vs. other options
Which is right for your situation?
Traditional business loans
Business loans generally offer lower rates of 6-15% APR for unsecured loans and 4-20% APR for secured loans. They have fixed repayments, require longer approval times (usually 2-8 weeks), provide funds in one lump sum and often require security for larger amounts.
Consider choosing traditional business loans for long-term investments and working capital finance for short-term flexibility.
Trade credit
Trade credit allows you to negotiate extended payment terms with suppliers, providing free short-term finance. But it could affect your supplier relationships and doesn’t provide cash for other expenses like payroll or marketing.
Trade credit can work well alongside working capital finance for effective all-round cash flow management.
Asset finance
Asset finance helps you buy equipment, vehicles or machinery using an asset as security. It typically offers better rates than unsecured working capital finance, but it’s restricted to specific purchases and doesn’t provide general working capital flexibility for your operational needs.
Equity finance
Equity finance provides funding without debt. But it also dilutes your business ownership and may require you to give up some control.
Equity is generally better for long-term growth capital rather than short-term working capital. And it may not be suitable if you want to maintain business independence.
How to apply for working capital finance
Eligibility criteria
Small businesses (£100k-£5m turnover): Most lenders want to see at least 6-12 months of trading, a minimum £100k of annual turnover and a good credit history.
Mid-market companies (£5m+ turnover): Larger businesses often qualify for larger credit facilities with better terms, and usually need to provide at least two years of trading and stronger financial covenants.
Documentation
You’ll usually need to provide 6-12 months of business bank statements, recent management accounts, profit and loss statements, balance sheets and VAT returns.
Most lenders now use Open Banking to access financial data directly, which can speed up the process.
Application timeline
It can take around 10-30 minutes to complete an online application. And initial credit decisions are often provided within a few hours to 48 hours.
Final approval and funds transfer can usually happen within 1-7 days, which is much faster than traditional bank lending.
If you’re borrowing a larger amount (e.g. £250k to over £500k), you might need to provide additional documentation which can lengthen the process.
Tips for startups with limited trading history
New businesses can improve their approval chances by providing detailed business plans, cash flow forecasts, evidence of contracts or orders and director guarantees.
Some lenders specialise in working capital solutions for startups or offer business cash advances based on future revenue potential.
Questions to ask lenders
It’s important to completely understand any finance agreement you make with a lender. Consider asking:
What’s the total cost including all fees?
Can the facility be reduced or withdrawn?
Are there restrictions on other borrowing?
What happens if I want to repay early?
How is the credit limit reviewed?
What kind of support’s available if I face difficulties?
Want to learn more about working capital?
How quickly can I access working capital finance?
Most working capital finance can be accessed within 24-48 hours for invoice finance and merchant cash advances. Revolving credit facilities and business lines of credit typically take 1-7 days. Working capital finance is much faster than traditional bank loans which can take several weeks.
What’s the difference between working capital finance and a business loan?
Working capital finance is designed for short-term operational needs like covering payroll, inventory or temporary cash flow gaps. It provides flexible access and charges interest only on the amount you use.
Overdrafts are a specific type of revolving facility that has a fixed limit and may charge fees on the unused portion. But both overdrafts and working capital finance offer short-term cash flow solutions.
Do I need to provide security or personal guarantees?
Lots of working capital products are available unsecured for established businesses that have strong financials. But larger facilities (typically over £500k) or higher-risk businesses may need to provide some security, such as property, assets or personal guarantees from company directors.
How much can I typically borrow?
Borrowing limits vary by product and the type of business applying for them.
Invoice finance can provide up to 90% of outstanding invoices. Revolving credit facilities typically range from £10,000 to £2 million. And merchant cash advances can provide around 10-20% of annual card sales.
Your limit will depend on your business turnover, trading history and creditworthiness.
What happens if I can’t make repayments on time?
The consequences of making late payment vary by lender but typically include penalty charges, increased interest rates and potentially even suspension of the credit facility.
If you anticipate difficulties, contact your lender immediately. They may offer payment holidays or restructuring options if your problems are temporary.
Can I have multiple working capital facilities?
Yes, lots of businesses use multiple facilities for different purposes. For example, they might use invoice finance for customer payments, a revolving credit facility for general expenses and purchase order finance for large contracts. But some lenders may restrict additional borrowing in their agreements, so check the terms carefully.
How do I calculate if I need working capital finance?
Current Assets - Current Liabilities = Working Capital.
If this is negative or less than two months of operating expenses, you may need additional working capital.
Businesses that review their cash flow often have a higher survival rate. And those who do it every month have a survival rate of 80%.
Can startups access working capital finance?
Yes, although their options may be limited. Invoice financing, merchant cash advances and some specialist lenders offer products for startups.
Your options will be improved if you have contracts, purchase orders or even a limited trading history of 3-6 months.
Invoice financing vs. factoring in the UK: What’s the difference?
Invoice financing allows you to retain control of your sales ledger and customer relationships. Factoring involves the lender taking over credit control and collecting payments directly from your customers.
How does working capital finance affect my credit score?
Like any credit facility, working capital finance appears on your business credit report. You can improve your credit score by making repayments on time. Late payments or defaults can damage it. The facility itself may cause a small dip due to the credit search during application, but this should be temporary.
Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.
It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.
Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.
Joe Morley
Business Finance Lead
Joe has been helping UK businesses secure the funding they need since 2015. Over the years, he’s supported hundreds of SMEs in accessing millions of pounds for everything from purchasing essential assets to unlocking working capital for day-to-day operations. As Head of Sales at Funding Options, Joe leads a large team of expert Business Finance Specialists dedicated to finding the right solution for every customer. His goal is simple - to make securing finance straightforward, stress free, and tailored to each business’s needs.