Working capital is the money available to a business to fund its day-to-day operations. It is a good measure of a company’s operational efficiency and health. It is calculated by Current Assets/ Current Liabilities.

If your Current Assets divided by your Current Liabilities is between 1.2 and 2.0, then that is considered good. Less than 1.0 indicates negative working capital with potential liquidity problems and this is where a working capital loan could help improve this.

If you have limited working capital, then you will struggle to grow your business as you don’t have the cash available to invest in new products/ services/ contracts etc. A working capital loan can therefore be used to provide the cash required to grow the business and make a return on the investment into the business.

A common reason to take a working capital loan is if you’ve won or been offered a new contract/opportunity but you don’t have the staff, materials and resources to fulfil it. In this instance, you could take out working capital finance to pay for the staff and materials required upfront, and then once the contract is complete, pay back the working capital loan and keep the profits, thereby having grown your business and increased it’s bottom line.

An unsecured term loan is usually the cheapest option for working capital finance as you can get up to £500,000 over 5 years at around 8%/ annum with just a personal guarantee. It’s worth noting that loans can be as low as 1.9% but on average are around 8%. This allows you to spread the cost of the working capital loan over a long term and keep the monthly repayments low. It takes around 2-3 days to get a working capital loan and so it is suitable if you need the funds quickly.

If you take the loan over the maximum 5 years but are able to pay back the loan early, then we have lenders that will allow you to pay the loan off early (or make over-repayments) at no cost, and you only pay for the interest you’ve accrued, not the full amount. So if you finish your contract after 16 months, then you can pay the loan back and you’ll only pay for 16 months’ worth of interest.

For more information on an unsecured term loan, click here.

A revolving credit facility acts just like an alternative business overdraft and it is the most flexible option. The facility allows you to drawdown what you require and only pay interest on that amount. You can dip in-and-out of it as you require and at no cost. You are only charged interest on the outstanding amount that you have drawn down.

This is particularly useful if you have a staggered contract where you know that you will need, for example £50,000 over the course of the contract but you only require £30,000 to begin with and the additional £20,000 in 6 months’ time. It is also perfect for purchasing additional stock and paying it back as the stock sells.

It’s worth noting that these credit facilities, due to their flexibility, typically come at a higher interest rate at around 1-3%/ month, but can be the cheaper option if the funds are required for a short period of time as some of the revolving credit facilities don’t charge any fees.

We also have a lender that can offer a facility with no security required whatsoever (no personal guarantee) up to £350,000 over 2 years. Do get in touch if this is of interest.

For more information on revolving credit facilities, click here.

If your business accepts card payments, then you can use this to raise working capital for your business. Lenders will typically lend up to 2 months’ card takings and the best part about it is that you only pay back a percentage of your card takings each month.

This means, that if you have a seasonal business and your card takings decrease or even if you close for refurbishment and you take minimal card payments that month, you still only pay a percentage of that amount and aren’t committed to a fixed monthly repayment. This can therefore be considered a much more stress-free type of finance and help maintain cash flow.

This flexibility can make it ideal for businesses who have unstable cash flow or are very seasonal and need increased flexibility when it comes to the monthly repayments.

For more information on merchant cash advances, click here.

Invoice finance is where lenders will pay you up to 85% of your invoices upfront and you will then receive the outstanding amount minus the lenders fee (typically 2-4%). This is a great way to free up cash as you just receive what’s already being paid to you, sooner. Invoice finance can be difficult to get out of and is usually a long-term type of finance.

Instead, you could use spot factoring or one-off invoice finance where you only provide a few select invoices to get finance against, instead of entering a full invoice finance agreement where they finance all of your invoices. This way, you can choose certain outstanding invoices to get finance against to raise some working capital.

However, invoice finance is limited to the amount of outstanding invoices that you have and so it may not always be the best option when it comes to getting working capital for growth.

For more information on invoice finance, click here.

Trade finance is for large businesses that need to purchase greater volumes of stock. With a trade finance facility the lender will pay your suppliers for your stock directly of which you then have 120 days to pay them back for that stock that they’ve purchased on your behalf + interest. The lender will typically want purchase orders upfront as proof of sale for the stock.

If you need funding quickly, this isn’t likely to be your best option as it can take 4-6 weeks to arrange. However, if you purchase a lot of stock with a turnaround time of less than 120 days, this can be a great way to grow your business as the lenders can look to purchase higher amounts of stock over time and grow with you.

If you’re unsure of the best option for you, do give us a call and we can help structure the best finance for you.