Working Capital Finance: The Complete Guide for UK Businesses

Working capital finance is any facility that funds the day-to-day running of a business, covering the gap between paying wages, suppliers and tax and collecting cash from customers. It suits profitable or growing UK businesses whose cash flow timing is uneven, for example because of long customer payment terms, seasonal stock builds or contracts that need funding before they pay.

Key facts

• Facility size: Growth Business Finance (GBF) arranges working capital facilities from £200k, with business loans up to £100m and asset based lending up to £100m.
• Revolving credit facilities (RCFs): from 2.5% over Bank Rate, committed for 3 to 5 years.
• Invoice finance: up to 90% of invoice value, and 95% to 100% in some sectors such as recruitment and retail.
• Asset based lending: one revolving facility across receivables, stock, plant and machinery and property, priced from 2% over Bank Rate.
• Term loans: from 6.5% a year or 2.5% over Bank Rate, up to 4x EBITDA, unsecured up to £2m.
• Bank Rate: currently 3.75%, set by the Bank of England.
• Government support: the Growth Guarantee Scheme offers a 70% government guarantee to lenders on facilities up to £2m per group.

How working capital finance works

Working capital is current assets (cash, debtors and stock) minus current liabilities (suppliers, tax and short-term debt). A business can be profitable on paper and still run short of cash if money is tied up in debtors or stock when bills fall due. Working capital finance converts those assets, or future cash flow, into cash at the point it is needed.

There are two broad approaches:

• Cash flow lending: the lender relies on your profits and cash generation. Examples are RCFs and term loans, usually sized as a multiple of EBITDA.
• Asset-backed lending: the lender relies on the value of assets on your balance sheet. Examples are invoice finance, stock finance and asset based lending, sized on the value of debtors, stock and other assets.

The main products

• Revolving credit facility: a committed limit you draw, repay and redraw. You pay interest on what you use and usually a commitment fee on the rest. Suits profitable businesses with variable needs.
• Invoice finance: advances against unpaid invoices that grow with your sales. See our invoice finance guide.
• Asset based lending: a single revolving line secured on receivables (up to 90%), stock (up to 90% of NOLV), plant and machinery (up to 85% of NOLV) and real estate (up to 80%). See asset based lending.
• Trade finance: pays suppliers for stock before you sell it, up to 100% of supplier cost for up to 180 days. See our trade finance guide.
• Revenue-based stock finance: for e-commerce businesses, up to 4x monthly revenue with no stock appraisal.
• Merchant cash advance: up to 2x monthly revenue, repaid from card takings.
• Term loans: a lump sum repaid over 1 to 10 years. Better for a one-off investment than a recurring cash gap.

Signs your business needs a working capital facility

• You regularly stretch suppliers or HMRC to cover payroll.
• Sales are growing but the bank balance is not, because debtors and stock are rising faster than cash.
• You turn down orders or contracts because you cannot fund the materials or staff up front.
• Your overdraft is fully drawn for most of the month, or your bank has reduced it.
• Quarterly VAT and corporation tax payments create a predictable squeeze.
• A large customer has extended its payment terms.

If two or more of these apply, it is worth reviewing your facilities before the pressure builds rather than after.

Who working capital finance suits

Almost every trading business has a working capital cycle, but the right product depends on where the cash is tied up:

• Recruitment and staffing: weekly payroll against monthly client payments. Invoice finance and ABL are the usual answers. See recruitment ABL.
• Wholesale and distribution: cash tied up in stock and debtors at the same time. See wholesale distribution ABL.
• Retail, e-commerce and consumer brands: seasonal stock builds and card-based revenue. See retail, e-commerce and consumer brands.
• Construction: stage payments and retentions. See construction.
• Technology and software: recurring revenue businesses can raise up to 70% of ARR through recurring revenue finance. See technology.

Costs and terms

All pricing is set deal by deal. Indicative starting points are:

On top of interest, expect some combination of arrangement fees, commitment or non-utilisation fees on undrawn limits, monitoring or audit fees on asset-backed lines, and legal costs. When comparing offers, model the total cost at your realistic level of usage across a full year, not just the headline margin. Our financial calculator helps with the arithmetic.

Eligibility and what lenders look at

Lenders want to see that the facility will be used to fund a timing gap, not to cover ongoing losses. They will typically review:

• Trading performance: revenue, gross margin, EBITDA and the trend over the last two to three years.
• The cash cycle: debtor days, creditor days and stock turn, and how these move through the year.
• Forecasts: a monthly cash flow forecast showing peak requirement and how the facility is repaid or revolved.
• Asset quality: for asset-backed products, the spread and credit quality of debtors and the saleability of stock.
• Existing debt: current facilities, security and covenants.
• Management: the experience of the team and the quality of financial reporting.

Documents you will need

• Last two to three years of filed accounts
• Year-to-date management accounts with balance sheet
• A 12-month monthly cash flow forecast
• Aged debtor and creditor reports
• Stock reports, if stock will be funded
• Recent business bank statements
• A schedule of existing borrowing and security
• A short note on what the facility is for and how it will be repaid

Comparing the main options

Common mistakes

• Using a term loan for a recurring gap. You pay interest on the full amount even when you do not need it. A revolving facility usually fits better.
• Relying on an overdraft that can be withdrawn. On-demand facilities can be reduced at short notice. Committed facilities give certainty.
• Sizing for today rather than the peak. Base the limit on your forecast peak requirement, with headroom.
• Ignoring covenants. Understand how the lender tests performance and how much headroom you have.
• Arranging finance in a crisis. Lenders offer better terms to businesses that plan ahead.
• Funding long-term assets with short-term money. Equipment and property belong on longer-term facilities such as asset finance or a commercial mortgage.

How a broker and debt adviser like GBF helps

Growth Business Finance is a commercial finance broker and debt adviser, not a lender. For working capital, our job is to match the facility to how your cash actually moves:

1. Map the cash cycle. We look at where cash is tied up and how the requirement moves through the year.
2. Recommend a structure. Often a combination works best, for example an ABL line for daily liquidity alongside a term loan for a specific project.
3. Prepare the lender case. We present your forecasts, assets and management information in the way lenders underwrite them.
4. Run a competitive process. We approach lenders whose appetite fits and compare total cost, flexibility and covenants.
5. Manage to completion. We coordinate due diligence, audits and documentation through to drawdown.

If you already have facilities, our facility health check reviews whether they still fit your business. For more on loan options, see business loans.

FAQs

What is working capital finance?

It is funding for the day-to-day running of a business, used to cover the gap between paying costs and collecting cash from customers. It includes RCFs, invoice finance, asset based lending, trade finance and short-term loans.

How much working capital finance can my business raise?

It depends on the product. Cash flow lenders lend up to 4x EBITDA on term loans, while asset-backed lenders lend against the value of debtors, stock, plant and property. GBF arranges facilities from £200k.

What is the cheapest form of working capital finance?

There is no single answer, as everything is priced deal by deal. Secured, asset-backed facilities and committed RCFs for strong businesses tend to be priced as a margin over Bank Rate, starting from 2% over Bank Rate for ABL and 2.5% over Bank Rate for RCFs.

Is a revolving credit facility better than an overdraft?

For many businesses, yes. An RCF is usually committed for 3 to 5 years, whereas an overdraft can normally be withdrawn on demand. The trade-off is that RCFs usually carry commitment fees and covenants.

Can I use the Growth Guarantee Scheme for working capital?

Yes. The British Business Bank's Growth Guarantee Scheme can support term loans, overdrafts, invoice finance and asset finance through accredited lenders, with a 70% government guarantee and up to £2m per group.

Do I need security for working capital finance?

Unsecured term loans are available up to £2m for strong businesses. Larger facilities and asset-backed products are usually secured by a debenture, and directors may be asked for guarantees.

Find out what you could raise

If cash flow timing is holding your business back, use check what you could raise for an indication of the facility your business could support, or call us on 020 3432 2341.

Growth Business Finance Ltd (company 17136039) is an Appointed Representative of Swoop Finance Limited (FRN 936513). Our FCA reference is 1034979. We are a commercial finance broker and debt adviser, not a lender. Finance is subject to status and lender approval.

Tom Renshaw

Founder and Managing Director, Growth Business Finance

Tom arranges business loans, asset based lending and property finance for UK SMEs and mid-market companies. More about GBF