Working capital loans and the finance that competes with them

What it is

Working capital is the cash that keeps the business ticking between paying for things and getting paid. When that gap gets tight, working capital finance fills it. It is not for buying a van or a building, that is what asset and property finance are for. It is for stock, wages, suppliers, marketing and growth.

The shape we see most weeks, described rather than a client case: a groundworks subcontractor invoices the main contractor on 60-day terms and pays its own crew every Friday. It is profitable on paper and short of cash every second week of the month. Businesses in that position use working capital facilities to cover the gap; the lender sets the size and the cost, and the business weighs them against its own figures. Timing, not trade, is usually the problem.

Your options

If you invoice other businesses on credit terms, also look at invoice finance, which releases cash from unpaid invoices; compare it on total cost for that situation.

Where the gap opens and closes rather than sitting open, a revolving credit facility charges interest only on what is drawn, so the cost follows use rather than the limit. That page works the utilisation arithmetic, which is the part a headline rate hides.

What it costs

Term loans are usually priced as an interest rate, so the cost is clear: the rate, any arrangement fee, and the total payable over the term. Always ask for the total amount repayable.

Pricing varies widely by product and lender, and each lender publishes its own rates, which change. Where you land depends on turnover, trading history, profitability and the director's credit, and we show the figures each lender gives for your case rather than a market average. A monthly figure on its own leaves out the term and the fees, so we show the total payable for each option side by side and leave the choice to you.

What lenders publish about price and criteria

Pricing on an unsecured loan is set case by case. The rate a lender advertises is the floor of its range, not the rate a given business will be offered.

Where a specialist lender can be easier than the high street is on criteria rather than price: each lender publishes its own minimum trading age and its own view of a director who rents. Other lenders publish stricter floors on trading history, turnover and home ownership, and cap borrowing at a share of annual turnover. Both positions are reasonable. They just describe different businesses.

The honest limitation on working capital: it is among the simplest products on our panel to arrange and the easiest to misuse. A facility taken for a known gap is repaid from the receipts that close it. A facility taken to cover the gap left by the last one adds a second set of repayments to the first, and each lender assesses that on its own checks.

Who uses it

A trading business with receipts a lender can see, short of cash because of timing rather than losses. Lenders read the last six months of bank statements before they read anything else, and most unsecured lenders want twelve months of trading; under that, fewer lenders' published criteria are met, and each lender decides. Borrowing adds a repayment to every month, whether or not the shortfall is about timing.