Working capital finance

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 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 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 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 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.

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 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.

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.

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.

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.

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.

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.

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.

Lenders can reduce or withdraw your credit facility, sometimes with little notice, particularly if your business circumstances change or you breach facility terms.

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.

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.

£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.

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.

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.

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.

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.

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.

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.

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.

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?

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.

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.

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.

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.

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.

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.

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%.

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 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.

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.