Working capital finance
Working capital finance pays for the gap between paying for stock, wages and suppliers and being paid by your customers.
Working capital finance pays for the gap between paying for stock, wages and suppliers and being paid by your customers.
The right product depends on where the cash is stuck: in unpaid invoices, in stock, in a tax bill or in a seasonal dip. Each one is repaid from trading cash coming in, so it suits a timing gap in a business that trades at a profit.
Every business that sells on credit or holds stock has cash tied up in its own trading. You buy stock or materials, you hold them until they sell, you invoice the customer and you wait to be paid. On the other side, your suppliers give you some time to pay them. The gap between money going out and money coming back is your trading cycle, measured in days.
It has three parts. Stock days is how long stock sits before it is sold: average stock divided by annual cost of sales, times 365. Debtor days is how long customers take to pay: trade debtors divided by annual sales, times 365. Creditor days is how long you take to pay suppliers: trade creditors divided by annual cost of sales, times 365. The trading cycle is stock days plus debtor days, minus creditor days.
A business with 45 stock days, 60 debtor days and 30 creditor days has a cycle of 75 days. For each of those days it is paying for its own customers’ credit and its own shelves. The working capital calculator works out yours from figures in your last accounts.
Shortening the cycle releases cash without borrowing anything. Invoice on the day you deliver, chase on the day an invoice falls due, hold less slow-moving stock and ask suppliers for longer terms. If a business customer pays late, the law lets you charge statutory interest at 8% plus the Bank of England base rate unless your contract sets another rate. Where no payment date was agreed, payment is late 30 days after the customer receives the invoice or you deliver, whichever is later. Finance covers the part of the gap you cannot close by managing the cycle.
Illustrative example
A wholesaler with sales of £1.8 million a year and cost of sales of £1.2 million. It holds 45 days of stock, its customers pay after 60 days and it pays its suppliers after 30 days.
If sales grow by a quarter and the three day counts stay the same, the cash tied up grows by a quarter as well: an extra £86,301, needed before the extra sales have produced any profit in the bank. A growth plan needs this figure in it, and a plan for where the money comes from.
Profit is counted when you make a sale. Cash arrives when the customer pays. In between, you have paid for the stock, the wages and the VAT on the invoice. A business can report a good profit for the year and still run short of cash on a Friday afternoon.
Four things widen the gap. Growth, because each new sale needs stock and credit before it brings in cash. A large customer that pays late or insists on long terms. A seasonal trade, where stock is bought months before the selling season. And tax: VAT, corporation tax and payroll taxes fall due on fixed dates whatever your bank balance says.
Each of these has a matching form of finance, set against the asset or the income that will repay it.
| What it lends against | How it is repaid | Fits | |
|---|---|---|---|
| Overdraft | Your bank’s view of your account and accounts | From money coming into the account | Short, irregular dips in the current account |
| Revolving credit facility | Your trading record, sometimes with security | Drawn and repaid as often as you need within the limit | Larger swings that recur across the year |
| Invoice finance | Your unpaid invoices | When your customers pay | Cash stuck in debtors |
| Trade finance | A specific purchase or supplier contract | When the goods are sold | Paying for stock and imports up front |
| Merchant cash advance | Your future card takings | A share of each day’s card sales | Card-taking businesses with uneven takings |
| VAT and corporation tax loans | Your trading record | Fixed monthly payments | A tax bill that falls at a bad time |
| R&D tax credit loans | An expected R&D tax relief claim | From the claim when it is paid | Research spending before the relief arrives |
| Recurring revenue finance | Subscription or contract income | Monthly from that income | Software and subscription businesses |
Invoice finance comes in three forms. With factoring the funder runs your credit control and your customers pay the funder. With invoice discounting you keep credit control and your customers need not be told. Selective invoice finance funds single invoices you pick.
Working capital finance is meant to rise and fall with your trade. You draw it when the cycle stretches and repay it when the cash comes in. That makes it the wrong tool for anything that pays back over years: a van, a machine, a fit-out or buying another business. Those belong on asset finance or a business loan, repaid over the working life of what they buy.
Buying equipment on an overdraft puts a five-year asset on a facility the bank can withdraw at any time. If the limit is cut at the annual review, you owe money the business cannot repay from a few weeks of trading, and the way out is a refinance on whatever terms are available that month.
The opposite mistake is a fixed loan for a seasonal gap. You pay interest all year on money you need for three months, and the repayments land in the quiet months when cash is lowest. A facility you draw and repay, such as a revolving credit facility, matches a gap that comes and goes, and you pay interest only on what you have drawn.
When a business reaches for short-term money to cover the same shortfall every month, the problem sits in the cycle itself or in the margin. More working capital finance makes that worse, because the interest comes out of the same thin margin. Look at prices, payment terms and stock levels first.
A funding search through Swoop connects to Companies House and to your accounting software, so a good part of this can be read from your records. The lender looks hardest at the aged debtors list: who your customers are, how much of the money sits with one or two of them, and how much is overdue.
The funding search runs on Swoop’s platform and is for limited companies and LLPs, and for sole traders and partnerships borrowing more than £25,000. Borrowing of £25,000 or less by a sole trader or a small partnership is regulated credit, which the people introducing businesses here are not authorised to arrange. If that is you, start with your own bank or the government’s Start Up Loans scheme, and check its current terms on its own site.
Some working capital facilities can carry a government guarantee. The Growth Guarantee Scheme page on gov.uk lists overdrafts, invoice finance and asset-based lending among the facilities it supports, for businesses with turnover up to £45 million and up to £2 million per business group. The lender decides whether to use it on your facility.
Where a lender asks a director for a personal guarantee, the business debt becomes a personal one if the business cannot pay. Read the guarantee before you sign it and look at the cover you hold: business protection can repay a facility if a key person dies or is seriously ill.
A limit you draw, repay and draw again over a fixed term, with interest only on what you use.
Read more →A limit on your business current account, reviewed each year and repayable on demand.
Read more →Borrowing against unpaid invoices, through factoring, discounting or single invoices.
Read more →The funder advances cash against your invoices and runs your credit control.
Read more →Borrowing against your sales ledger while you keep your own credit control.
Read more →Funding for single invoices you choose, priced invoice by invoice.
Read more →Finance that pays your suppliers for stock and imports, repaid when the goods are sold.
Read more →The provider is repaid from a share of your future card takings, at a cost set by a factor rate.
Read more →A short loan that pays your VAT bill on the due date and spreads the cost over a few months.
Read more →A loan that pays your corporation tax bill on the due date and spreads it over several months.
Read more →A loan against the R&D tax relief your company expects to receive, repaid when the claim is paid.
Read more →Lending against subscription or contract income, for software and subscription businesses.
Read more →The days between paying for stock and being paid by customers, and the working capital that gap ties up.
It is short-term borrowing that covers the gap between paying out for stock, wages and suppliers and being paid by customers. The main forms are overdrafts, revolving credit facilities, invoice finance, trade finance, merchant cash advances and loans for tax bills. Each is repaid from trading cash as it comes in, so the facility shrinks when the gap closes. It is meant for timing gaps in a business that is trading at a profit.
Add what customers owe you to the value of your stock, then take off what you owe suppliers. That is the cash tied up in trading today. To see how it moves, work out your stock days, debtor days and creditor days from your accounts and apply them to next year’s forecast sales. The difference between today’s figure and next year’s is the extra cash growth will need, before any finance.
There is no single figure, because it depends on the trade. A business paid in cash at the till that pays suppliers on 30-day terms can run a negative cycle and be funded by its suppliers. A contractor waiting on stage payments can run a cycle of three months or more. Compare your own figure year on year and against your forecast. Funding is needed when the cycle lengthens while sales grow.
Some is and some is not. Invoice finance is secured on the invoices themselves, and the funder will take a debenture over the company. Overdrafts and revolving credit facilities may be unsecured for smaller amounts and secured by a debenture for larger ones. Lenders to limited companies commonly ask directors for a personal guarantee as well, so check what you are signing before you accept an offer.
It is harder, because the lender has no trading record to read. Invoice finance can work for a young business if its customers are established and creditworthy, since the funder is relying on them to pay. A merchant cash advance needs a record of card takings. For a business with no record at all, see whether a new business can get a loan and the options for start-up funding.
Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.
Borrowing against unpaid invoices, through factoring, discounting or single invoices.
Read more →A limit on your business current account, reviewed each year and repayable on demand.
Read more →A limit you draw, repay and draw again over a fixed term, with interest only on what you use.
Read more →Finance that pays your suppliers for stock and imports, repaid when the goods are sold.
Read more →Funding searches run on Swoop’s platform. Swoop Finance Limited is a credit broker and not a lender, and is authorised and regulated by the Financial Conduct Authority (FRN 936513). Buzz Accounting Ltd introduces businesses to Swoop and may receive a fee from Swoop when funding is arranged. Business funding is separate from the financial advice Equity & General Financial Services Limited gives through this website. Finance is subject to status, and a lender may ask a director for a personal guarantee.
If a lender asks you to guarantee the company’s borrowing, our advisers can advise on life cover for that debt.