Working capital finance: seasonal vs. year-round uses

The supplier catalogues youʼve been looking at for Christmas stock have made you feel optimistic about the money you can make over the festive trading period. The £30,000 you need to buy it is in the company account. The only problem is itʼs there to cover the salaries and bills that are due every month. And even if you could spend that money now, you wonʼt see the money from sales until December at the earliest.

Itʼs a classic conundrum for SMEs and one that doesnʼt only affect seasonal businesses – 24% of businesses say a lack of working capital prevents them from growing. If youʼre considering external finance to bridge these gaps, youʼre far from alone in doing so. But what might suit your situation will  depend on whether you need it for specific peaks or for ongoing support throughout the year. A short-term business loan might work perfectly for stocking up ahead of a business trading period, but for a business with ongoing needs, invoice finance could well be a better bet.

In this article, weʼll consider the different types of working capital finance available and suggest ways you can decide which one might be right for you. 

Key points:

• Short-term loans and merchant cash advances are time limited options for businesses that need to fill working capital gaps seasonally

• Revolving credit facilities and invoice finance offer consistent access to credit for businesses with year round credit needs

• Funding Options by Tide can help when optimisation of working capital isnʼt enough, offering access to business finance up to £20 million

What is working capital finance? 

Working capital finance is an umbrella term that covers several different types of products. Working capital is the money you need for all your regular expenditure. It pays for stock, salaries, and bills as money comes in from sales and goes out again.

All businesses can experience gaps in working capital, irrespective of how theyʼre performing. You might have £50,000 worth of invoices outstanding and a healthy order book, but if your rent, wages, and supplier payments are due before those invoices get paid, youʼve got a working capital gap to fill.

Even positive developments like business growth can cause gaps, as taking on more work or expanding your product range means youʼll have to spend money before you see the returns. Seasonality is also often a factor as businesses with predictable peaks and troughs throughout the year can face periods where they need significantly more cash than usual.

Working capital finance helps bridge these gaps without eating into your reserves or turning down opportunities because you donʼt have the funds to act on them. Some of these types of finance work better if you see seasonal dips in your working capital or others are more appropriate if it regularly needs a boost.

Seasonal working capital finance

If your business regularly goes through busy and quiet periods, seasonal working capital finance could be worth considering. Assessing how predictable these periods are will help you decide if this kind of finance is right for you. To do this, look through your bank statements from the past couple of years to see if you can spot clear patterns. If you can see when youʼll need extra cash and when youʼll be able to pay it back, some of the following working capital finance options might be right for your business: 

• Short-term loans: You borrow a fixed amount and agree on a repayment schedule that aligns with the fluctuation of your seasonal revenue. Because the interest rate is typically fixed, youʼll always know what you owe each month, which can make financial planning easier.

• Invoice finance: Lets you access most of the value (typically 80-90%) of your unpaid invoices within a couple of days, rather than waiting weeks for payment. The beauty of this type of funding is that it matches your busy periods; the more invoices youʼre issuing, the more cash is available to you.

• Merchant cash advances: Suitable for businesses that take card payments. You get a lump sum upfront, and repayments are taken as a percentage of your daily card sales. When business is brisk, you pay back more; when it quietens down, repayments drop too. One of the more expensive finance options though.

If youʼre thinking of applying for one of these, make sure you submit your finance application well before your working capital gaps occur. Most lenders want to see applications 2-3 months before you need the money, giving them time to assess your business. That also gives you time to weigh up your options or try to negotiate more favourable terms. 

When youʼre speaking to lenders, do mention that you want the repayment strategy to mirror your seasonal revenue pattern. If youʼre applying for a short-term loan in September to cover stock for your Christmas trading, your repayments would ideally start in January or February when you expect to have the money from those sales. 

Year-round working capital finance

Some businesses need consistent working capital support throughout the year, not just during peak seasons. You might be extending payment terms for your best customers because the relationship’s lucrative or need to hold significant stock levels throughout the year, meaning youʼre consistently paying suppliers to maintain your inventory. In both cases, itʼs easy to see how a gap in your finances might open up.

• Revolving credit facilities: These work like an overdraft but offer significantly higher credit limits. For example, if youʼre approved for a facility of £50,000, you can draw down whatever you need, whenever you need it, up to that limit. You only pay interest on what youʼre actually using, and as you repay, that money becomes available to borrow again.

• Invoice finance: Transforms your sales ledger into a consistent source of cash flow as you can access funds quickly against every invoice you raise, year-round. For B2B businesses with creditworthy customers and regular invoicing, this can provide a steady flow of working capital that grows in proportion to your sales.

• Asset finance: No immediate cash injection, but an option that will let you keep the working capital youʼve got in the bank if you need equipment, vehicles or machinery to grow or operate. Rather than paying a significant lump sum upfront, you spread the cost over time and make manageable monthly payments for the asset.

You'll notice we've included invoice finance as suitable for both businesses that need year round and season working capital finance. This is due to the differing payment processes businesses have. For example, some businesses have cut off dates for payments they'll make 30 days later and if your invoice lands a day after this, you might find yourself having to wait 60 days for that payment instead. 

If you're not receiving revenue on regular, predictable dates, either because your customers all pay at slightly different times or because you sell more at certain times of the year, invoice finance can work can for both. 

Which working capital finance works best for my business?

When deciding which kind of finance works best for your situation, consider the following:

• How predictable are your cash flow needs, and are they one-off or recurring? This will either steer you toward fixed arrangements like short-term loans or more flexible options like revolving credit.

• How quickly do you need the money? Invoice finance and merchant cash advances can provide funds within a couple of days, while other options could take a few weeks to set up.

Some businesses find that combining different types of working capital finance works better than relying on just one. For example, you might use a revolving credit facility for general working capital needs throughout the year, then add a short-term loan specifically for seasonal stock purchases. Or you could combine asset finance for equipment with invoice finance for day-to-day cash flow.

Donʼt wait until you really need the money before applying. Lenders are more likely to approve your application if they see that youʼre planning ahead and thinking strategically. Applying for finance from a position of strength usually gets you better terms than applying when youʼre desperate to find a solution.

Find business finance with Funding Options by Tide

Whether youʼre looking for a standard business loan, a short-term business loan, or something a little more specialist, like auction finance for property developers, weʼre one of the leading names in business finance in the UK, having helped facilitate over £1 billion in finance to more than 20,000 customers.

Checking if youʼre eligible is free, only takes a few minutes, and while a full application would impact your personal or business credit score, checking eligibility wonʼt. Just submit your details via the link below to find out if you could be eligible to borrow up to £20 million.

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FAQs

How much does working capital finance typically cost?

Costs vary significantly depending on the type of finance and your business circumstances, with short-term loans at 6-15% APR, revolving credit at 8-12% and asset finance at 5-15% APR. 

Invoice finance is charged at 1-3% of invoice value plus interest. Merchant cash advances donʼt come with an equivalent APR as they involve both a lump sum and a percentage charge on takings but if they did, they’d likely be the most expensive form of these type of loans. 

Can I use multiple types of working capital finance together?

Yes, many businesses combine different types – perhaps a revolving credit facility for everyday needs alongside asset finance for equipment and a short-term loan for seasonal peaks. Youʼll need to assess whether your cash flow can comfortably handle the combined repayments, and lenders will want to know about existing finance arrangements when assessing new applications.

Whatʼs the typical approval time for each option?

Invoice finance and merchant cash advances are usually quickest at 24-48 hours for approval, while short-term loans take a few days to two weeks, and revolving credit facilities and asset finance typically need 2-4 weeks for initial setup. 

Can startups or newer businesses access working capital finance?

Newer businesses can access some types of working capital finance, though options are often more limited than for established businesses. Merchant cash advances and some short-term loans might be available with just a few months of trading history, while revolving credit facilities typically require at least 12-24 months of accounts and stronger financials.

What happens if I canʼt make a repayment?

Contact your lender immediately if youʼre struggling as most prefer to work with you on a solution rather than letting the situation escalate. Options might include temporarily reducing payments, extending the term, or restructuring the arrangement, although missing payments will affect your credit score and could result in additional fees or, in worst cases, legal action to recover the debt.

Can I pay off working capital finance early?

Most finance agreements allow early repayment, but some lenders charge an early settlement fee to cover the interest theyʼre losing. Itʼs worth checking the terms before you sign as some lenders offer flexibility with no early repayment charges, while others might charge a percentage of the outstanding balance or a few monthsʼ worth of interest.

Will I need to put up collateral to access this type of finance?

It depends on the type of finance type and your business situation. Invoice finance and merchant cash advances generally donʼt require traditional collateral, asset finance uses the asset itself as security, while short-term loans and revolving credit facilities might be available unsecured for established businesses but often need security or personal guarantees for newer or higher-risk businesses. The specific requirements vary significantly between lenders and depend on factors like your trading history, financial strength, and the amount youʼre borrowing.

How often can I reapply for seasonal finance?

As often as your business needs it. Many seasonal businesses arrange finance annually for their peak trading period. Some lenders might offer you repeat arrangements with simpler applications once they know your business, while others might want to reassess your situation each time, so itʼs worth building a relationship with a lender who understands your seasonal patterns.

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.

Itʼs 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 applicantsʼ circumstances and creditworthiness. Funding Options will receive a commission or finderʼs fee for effecting such finance introductions.