Working capital finance

The UK’s economic growth is predicted to be between 1% and 2% this year and sterling is currently competitive in foreign markets. This means that there are excellent opportunities for businesses that want to invest in future growth.

However, for many smaller businesses, finding the funds for these plans can be a challenge.  As well as business loans from the bank, there are grants and private investors – even crowd funding could be and option.

Another possibility that can work for well-established smaller businesses is working capital finance.

Working capital is the difference between your company’s current liquid assets (such as stocks, debtors and cash at bank) and current liabilities (essentially, your creditors).

Working capital finance helps you to take advantage of opportunities or to launch a new short- to medium-term strategy. It can be based on fixed assets that you own or on the strong performance of your business.

For short-term needs a business overdraft can be useful, but it will usually be limited to a small amount. Banks are increasingly reluctant to provide them too.

Invoice finance or invoice discounting can speed up your payment cycle and remove the uncertainty of overdue payments. Once you have sent your lender a copy of your invoices a pre-agreed proportion of each invoice will be deposited in your account. This money can then be used to pay bills, repay debt, or as part your business growth plans. Of course there is a fee for the service and it might not release enough funding.

For a secured working capital loan, you will need to use your business assets as security. The assets you have available will restrict the amount you can borrow.

Unsecured business loans of up to £500,000 can be available if your credit rating is strong, although a personal guarantee might be needed. This means that your lender could seek to recoup any unpaid loan from your personal assets if your company became insolvent.

If you accept card payments from customers, you might consider a merchant cash advance. If you are a retailer or run a hospitality business for example, you could receive a percentage of your average monthly card revenue (such as 125%). Repayments are taken at the source as a percentage of your future card revenue.

If your tax liability is limiting your working capital, funding is available for paying VAT or corporation tax. A loan for your tax bill will allow you to spread the costs over three to 12 months, helping to release cash for your business plans.

With so many types of working capital financing available choosing the right option for your business can be confusing. We are always happy to provide advice, so please get in touch.

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