What is working capital finance?

Working capital is the money your business needs to maintain its day-to-day operations. It is the remaining cash after considering both the outflow and inflow of funds within your business.

If your company is facing temporary cash flow challenges or seeking to take advantage of growth prospects, working capital finance may offer valuable assistance. There are numerous forms of working capital finance to consider, and eligibility is influenced by factors such as your industry, business stage, and model. Your choices encompass a range of loan types, from capital investment to cash advances.

Working capital loans

Funding for day-to-day short or medium-term needs.

Collateral is necessary for secured loans, while unsecured loans typically hinge on your credit score and often require a personal guarantee.

Purchase order (PO) financing

Purchase order financing can be a valuable resource for companies that lack the funds to pay their suppliers upon receiving a customer order. In this scenario, a lender steps in to provide a loan that covers the cost of the supplies. After the customer payment is received, the lender subtracts their fees and then transfers the remaining balance to the business.

Invoice finance

This method, also known as factoring and discounting, involves receiving a loan with an unpaid invoice as security.

Merchant cash advance

A lender offers an initial payment in return for a share of a business’s future daily credit or debit card sales.

Asset-based finance

A type of loan that utilizes the assets listed on a company’s balance sheet as collateral.

How does working capital finance work?

Securing working capital loans can be done in two ways: secured or unsecured. When opting for secured finance, you are required to offer assets from your balance sheet as collateral for the loan, which can range from physical assets like stock, equipment, debtors, machinery, and property to intangible assets such as intellectual property (IP).

On the other hand, unsecured financing places more emphasis on your business profile. Lenders will scrutinize factors like business turnover, history, credit rating, and may even delve into your credit score and request a personal guarantee. Due to the higher risk associated with unsecured funding, interest rates are generally higher and the borrowing limit is usually lower compared to secured finance.

Working capital finance offers a swift way to access funds; businesses often receive the money within 24 hours of applying. While traditional bank loans from banks can also be approved quickly at times, they typically entail more paperwork than alternative methods like invoice finance and merchant cash advances. In the case of invoice finance and PO financing, a fee is charged based on a percentage of the invoice value.

When choosing working capital finance for your business, it’s important to take into account various factors. It’s advisable to seek independent financial advice to determine the most suitable method for your specific circumstances. Consider your business’s financial situation and its ability to repay debts when making funding decisions. Additionally, evaluate the cost of working capital finance before proceeding with an application.

While modern methods like invoice finance and merchant cash advances offer quicker access than traditional bank loans, they often come with higher fees overall. It’s crucial to consider how this could affect your business’s cash flow. Assessing the impact of working capital finance on your business credit score and long-term financial health is also a wise move.

It’s essential to be mindful that failure to repay funding on time could have a negative impact on your credit score, potentially reducing future financing opportunities. While working capital finance can be beneficial for businesses facing cash flow challenges or aiming for growth, not all solutions are suitable for every business. Therefore, it’s vital for business owners to carefully evaluate all options before moving forward with an application.