Working capital finance for UK companies

Working capital finance fills the gap between money leaving the business and money coming back in. The best facility is one that matches the length and shape of that gap, so the starting point is understanding your own cash cycle.

1. Map the cycle. Work out how many days pass between paying suppliers or staff and receiving payment from customers. Accountants call this the cash conversion cycle: stock days plus debtor days, minus creditor days.
2. Size the gap. Multiply the length of the gap by your typical daily costs to estimate how much cash is tied up at the peak.
3. Choose a structure. A lump sum suits a one-off gap, while a recurring or seasonal gap may suit a facility you can draw on repeatedly.
4. Lender assessment. The lender reviews bank statements, turnover patterns and credit records, and may ask for a cash flow forecast.
5. Drawdown and repayment. Funds are paid out and repaid on a schedule that, ideally, lines up with when your income arrives.

The aim is for the facility to be repaid from the cash the gap was holding back, not from future borrowing. If the business needs new working capital finance to repay the last facility, that is a sign the underlying cycle needs attention.

Beyond short-term loans, revolving facilities and sales-linked funding, several other structures help with working capital. Each targets a different part of the cash cycle.

• Stock finance: funds the purchase of stock or raw materials, with the lender repaid when the goods are sold.
• Trade finance: pays overseas or domestic suppliers before goods arrive, giving the company time to sell before it repays.
• Business overdraft-style facilities: offered by some lenders as a flexible limit linked to a business account.
• Supplier-term extension funding: a lender pays suppliers promptly while the company repays over a longer period, which can unlock early-payment discounts.
• Tax-specific funding: loans designed around HMRC deadlines, such as VAT loans.

Working capital finance is priced for short-term risk, so the annual equivalent cost is often higher than longer secured lending, even when the cash amount of interest is modest. The fair test is the total repayable compared with the benefit the funding brings.

Typical charges include:

• Interest or a fixed fee: short-term loans are often priced as a fixed charge or factor, so you know the total repayable from the start.
• Arrangement fee: charged when the facility is set up.
• Non-utilisation or facility fees: some revolving facilities charge for the unused limit or an annual renewal fee.
• Drawdown fees: occasionally charged each time money is drawn.
• Early settlement terms: some fixed-fee products do not reduce the cost if you repay early, while others give a rebate.

When comparing, also count the benefit side: a supplier discount, a larger order that would otherwise be refused, or penalties avoided. Working capital finance makes sense when that benefit clearly exceeds the cost.

Illustrative example only: actual costs depend on the lender and your circumstances.

A hypothetical wholesale distributor needs £60,000 in September to buy stock for its busy winter season. It takes a 12-month working capital loan with a monthly repayment of £5,600 and a £1,200 arrangement fee.

• Total repayments: £5,600 x 12 = £67,200
• Interest or charge element: £67,200 minus £60,000 = £7,200
• Arrangement fee: £1,200
• Total cost of credit: £7,200 + £1,200 = £8,400

If buying the stock earlier secured a supplier discount of £3,000 and enabled extra sales with a gross profit of £15,000, the funding pays for itself. If those sales were uncertain, a shorter term or a smaller amount would reduce the risk. The working capital calculator helps you test different scenarios.

Most lenders base the facility on recent monthly turnover shown in bank statements, then check that repayments fit within the company's spare cash. The purpose and the length of the cash gap also influence the amount offered.

• Turnover-based limits: many short-term lenders cap the facility at a proportion of average monthly or annual turnover.
• Repayment capacity: lenders look at the balance left after regular costs and existing finance, and avoid repayments that would leave the account stretched.
• Asset-based limits: invoice and stock finance are sized on the value of the invoices or stock, so the limit rises and falls with trading.
• Forecasts: for larger facilities, a monthly cash flow forecast showing the gap and its recovery can support a higher limit.

Borrowing the full amount offered is not always wise. Taking only what the cash gap requires keeps repayments manageable and costs down.

The main risks with working capital finance are short repayment schedules that drain cash quickly, personal guarantees, and facilities that can be withdrawn at short notice. Check each before you commit.

• Repayment frequency: weekly or daily collections can put more pressure on cash than monthly ones.
• Personal guarantees: the extent of each director's liability, and whether it covers future drawings on a revolving facility.
• Review and withdrawal: whether a revolving limit can be reduced or cancelled, and how much notice the lender must give.
• Renewal: whether the facility needs to be renewed each year and what fees apply.
• Stacking: taking several short-term facilities at once can quickly become unaffordable, and some agreements prohibit further borrowing.
• Security: larger facilities may require a debenture over the company's assets.

A short-term working capital loan is best for a clear, temporary gap with a known end date. When the gap repeats or is tied to sales, a different structure may be cheaper and more flexible.

• Revolving credit facility: often better for repeated, unpredictable needs, as you pay interest only on what you draw and can reuse the limit.
• Invoice finance: usually better for B2B companies waiting on customer payments, because funding grows with sales rather than being a fixed sum.
• Merchant cash advance: can suit card-taking businesses whose sales fluctuate, as repayments are a share of takings.
• Unsecured business loan: better for longer-term investments that pay back over several years rather than months.

Some lenders will consider it, because short-term lenders often focus more on recent bank statements than on older accounts. However, criteria vary widely and approval depends on the full picture.

Recent, consistent turnover and a well-run bank account can count for a lot. Resolved credit issues are often viewed more kindly than recent ones. Lenders with shorter minimum trading periods may offer smaller amounts or shorter terms at first. Invoice-based finance can sometimes help where the strength lies in the company's customers rather than its own track record. Your relationship manager will tell you honestly whether an application looks realistic.

Working capital finance for limited companies, LLPs and partnerships of four or more partners is generally unregulated, and Consumer Credit Act protections generally do not apply. The agreement you sign sets out your rights and obligations.

Welcome Finance is not authorised or regulated by the FCA and arranges unregulated business finance only. Read every document carefully, pay attention to guarantees and withdrawal clauses, and take independent legal or financial advice if you are unsure.

Your dedicated relationship manager, a real person you can reach by phone, email and chat, helps you work out the size and shape of your cash gap before matching it to suitable lenders on our panel. They stay with you until the lender pays out.

1. Check eligibility in about 60 seconds, without affecting your credit score.
2. Talk through your cash cycle, the amount and how you expect to repay.
3. We compare suitable structures and lenders, and explain the total repayable for each.
4. When you choose to apply, the lender carries out its own credit checks.
5. We review the offer with you, including repayment frequency, fees and guarantees.
6. Your relationship manager follows the application through to funding.

There is no fee for your company. We are paid a commission by the lender when the finance completes, you can ask the amount, and it can differ between lenders. Read how we are paid.

How do I calculate how much working capital my company needs?

Estimate the days between paying costs and receiving income, then multiply by average daily costs. A monthly cash flow forecast gives a more accurate picture.

Is working capital finance suitable for a growing company?

Often, because growth ties up cash in stock and unpaid invoices. Facilities linked to sales can grow alongside the business.

Can I use working capital finance to buy equipment?

It is usually better to fund equipment with asset finance or a longer loan, so the repayments match the asset's working life.

Can a company have working capital finance alongside other borrowing?

Yes, if the lender is satisfied the total repayments are affordable. Existing lenders' consent may be needed if they hold a debenture.

What is a cash flow forecast and do lenders need one?

It is a month-by-month projection of money in and out. Smaller facilities may not need one, but it strengthens any larger application.

Can working capital finance be repaid weekly?

Some lenders collect weekly or in line with card takings. Choose a frequency that matches when income actually arrives.

What if the cash gap lasts longer than expected?

Speak to the lender early. Extending or refinancing may be possible, but it adds cost, so it is worth reviewing the underlying cash cycle too.

Do seasonal businesses get treated differently?

Lenders that understand seasonal trading may look at a full year of statements rather than just recent months, which gives a fairer view.