Working capital finance for UK businesses

Keep your business agile and ready to grow by using working capital finance to help finance for your everyday business operations and avoid lengthy debt commitments.

Why would you use working capital finance?

Working capital finance may be a good fit if your business needs money to pay normal operating expenses, such as payroll or equipment hire costs, pursuing a new business opportunity or taking on a new contract.

In the simplest terms, the working capital fund refers to finance used to run everyday business operations. This finance is repaid in the short to medium-term rather than as a long-term investment. Working capital finance is about allowing the business to remain agile and grow without taking on lengthy debt commitments.

There are many different kinds of working capital finance, but we’ll focus on three types: working capital loans, revolving credit facilities and overdrafts.

You can learn more about other kinds of working capital finance elsewhere on the platform, including invoice finance and merchant cash advances, as well as find out about the advantages of trade credit.

How does working capital finance work?

Working capital loans 

A working capital loan is designed to help SMEs keep the business running smoothly until cash flow improves. Perhaps business is a little slow or sales are seasonal, or maybe invoices are taking time to clear with customers. The amount borrowed is limited to what can be recovered in the short to medium term.

Revolving Credit Financing 

Revolving credit financing works by allowing businesses to borrow as much as they need up to an agreed credit limit. Credit cards are perhaps the simplest example of revolving credit financing. Unlike traditional loans, there is no set repayment schedule and you only need to pay interest on outstanding funds.

In addition, and unlike with credit cards, you don’t need to make a purchase to access the money. Once you have agreed a facility you can transfer the available funds to other business accounts and use as required.

Business Overdrafts

Business overdrafts offer another lending option and can often be obtained at short notice. However, traditional banks have become less willing to offer overdraft facilities to businesses, especially those without stellar credit scores. Nonetheless, overdrafts remain a viable source for emergency working capital, although the limits usually mean only small amounts of finance can be obtained. Several alternative finance providers offer overdraft products to small and medium-sized businesses.

What are the costs of working capital finance?

The interest rates on working capital loans are typically high. This is to offset the risk the lender bears and to allow it to make the most profit from the relatively short repayment period.

With a revolving loan a business usually pays a commitment fee to access the money. Just as with working capital loans, interest rates are typically higher to reflect not only the risk from the revolving credit lender’s perspective but also the convenience and flexibility of the arrangement. Interest rates for revolving credit facilities are normally lower than for credit cards. Revolving loans tend to have a variable interest rate.

Business overdrafts are best used as a contingency fund when other options have been exhausted. An arranged overdraft facility will be subject to a fee and interest will be charged on the amount that the business borrows.

How long does it take to secure working capital finance?

Working capital loans can be quick to obtain, especially if your credit score is good and there is no need to secure the finance.

Revolving credit finance can take a little longer to set up as the lending company will want to check cash flow and trading documents as well as review the credit score.

Business overdrafts can often be obtained at short notice. You may find it difficult to agree an overdraft if you have poor credit. Also bear in mind that banks can “call in” or cancel an overdraft at short notice and order you to repay the outstanding amount in full.

What type of security do I need for working capital finance?

If your credit score is good, you can likely agree an unsecured loan with a working capital finance company. If your credit score is less favourable, then the business will probably need to offer some security in return for the loan, typically inventory or other assets. In addition, directors may need to offer a personal guarantee for the borrowed funds.

Revolving credit lenders offer both secured and unsecured facilities.

If your business overdraft is secured by home or other property, these could be at risk if the bank or finance organisation calls in your facility.