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Working Capital Loans
Working Capital Loans for Small Business
A working capital loan is designed to help your business cover day-to-day costs or unexpected expenses when your cash flow won’t stretch far enough. It can be a useful short-term solution, especially for seasonal businesses that see rises and falls in income.
Table of Contents
What is a working capital loan?
Working capital loans can refer to a few different products, from standard business loans to a merchant cash advance and invoice finance. But they are all used for broadly the same purpose: accessing funds to keep your day-to-day operations moving, and repaying in a way that fits your cash flow.
Unlike some other business loans, which are designed to cover long-term investments, a working capital loan is a type of short-term finance. It can work like a safety net to cover unexpected expenses, such as repairs, as well as everyday costs like rent, wages, stock, and suppliers, when you don’t have enough cash available.
» COMPARE: Best business loans
How does a working capital loan work?
Most business finance products will be either secured or unsecured:
- A secured business loan uses business assets as collateral. As a result, you may be able to borrow larger amounts over a longer term, often at a lower rate of interest. However, your assets may be at risk if you are unable to repay the loan.
- Unsecured business loans do not require you to put forward any assets as security for the loan, with your eligibility more dependent on your credit history. You may find it harder to qualify, especially if you haven’t been trading for long, which means you may need to provide a personal guarantee.
What working capital finance options are there?
You can use several business loan products to access working capital, and each has its own advantages and disadvantages.
Short term business loans
A short-term business loan gives your business a lump sum that you repay over a short, usually up to a year. Businesses often use these to manage cash flow, pay bills, hire staff, or buy stock and equipment.
Short-term business loans can be secured or unsecured, depending on the provider as well as your own business turnover and credit history.
| Pros | Cons |
| You can access cash quickly, sometimes within 24-48 hours. | You’ll usually face higher monthly repayments as the loan is repaid over a shorter period. |
| Applications are often straightforward. | Borrowing limits are lower than other loans, and interest rates can be higher. |
How much does it cost?
Short-term loans can often be more expensive than standard long-term borrowing, especially if the loans are unsecured. You’ll need to pay interest, plus arrangement fees and potential costs for early or late repayments.
Is my business eligible?
You’ll usually need to be a UK-based, actively-trading business with steady income. Most lenders will look for a minimum turnover and at least 6-12 months of trading history, though startup loans are available. Your business credit history will also affect how much you can borrow and the interest rate, and you may need to give a personal guarantee or put an asset up as security.
» COMPARE: Short-term business loans
Invoice finance
Invoice financing lets businesses access funds currently locked up in unpaid invoices, often up to 90% of the total invoice value. Generally aimed at B2B businesses, invoice financing is often used for working capital when customers haven’t yet paid their invoices.
Depending on the type of invoice financing you choose, the responsibility for collecting the debt could remain with you or shift to the invoice finance provider. If you opt for invoice factoring, the provider buys the debt from you and collects payment from your customer. If you choose invoice discounting, the provider will lend you the money, which you repay once your customers pay you.
| Pros | Cons |
| Invoice factoring can be a quick way to access funds without technically going into debt as you are already owed the funds. | Invoice finance products can come with high fees and interest rates. |
| You can often choose which invoices you want to finance – known as selective invoice financing. | Some providers may insist on whole ledger financing rather than selective financing. |
| Providers focus more on your customers’ credit rating than yours. | You could risk customer relationships by selling their debt if a third party becomes responsible for collection. |
How much does it cost?
There are two main types of cost associated with invoice financing: the interest charged on the loan amount, and any fees you have to pay. Invoice factoring usually involves service or management fees for using the facility, and discount or finance fees, which reflect the cost of borrowing the funds. There may also be late payment fees if your customers don’t pay on time.
Is my business eligible?
Invoice finance is aimed at B2B businesses with a high volume of invoices. To qualify, these invoices will need to be valid, not used as security elsewhere, and for goods or services already delivered. While your own business credit score is not always as important, lenders will pay attention to how reliable your collections are and how creditworthy your customers are. Lenders are also likely to have certain requirements regarding your business turnover and trading history.
» COMPARE: Invoice finance
VAT loans
Rather than giving you access to funds you can use as working capital, VAT loans help you spread the cost of quarterly VAT payments. This will usually be over a few months, as opposed to paying the lump sum.
This allows you to use your existing capital for day-to-day operations and making the loan repayments, rather than parting with a significant amount of cash up front.
| Pros | Cons |
| You can spread the cost of a lump sum payment and preserve working capital. | You’ll still need to pay interest and arrangement fees. |
| You reduce the risk of missing your HMRC deadline. | The loan will need to be repaid in a shorter time, typically within 12 months. |
How much does it cost?
This depends on the provider and your circumstances, but you’ll find that interest costs can be higher than average. This is because these loans appeal to businesses where cash flow can be an issue, so lenders may see them as higher risk borrowers. Some lenders may charge fees per transaction instead of interest.
You’ll also need to factor in any charges involved, such as arrangement or servicing fees and charges for late or early repayment.
Is my business eligible?
You will generally need to be UK-based, over 18, with a VAT-registered business. Lenders will have their own requirements regarding turnover, trading history and credit scores, while some may ask for a personal guarantee or even an asset as security.
» COMPARE: VAT loans
Merchant cash advance
A merchant cash advance (MCA) can be a good option for businesses that regularly take card payments. Typically, you’ll be offered a cash advance based on your average sales. Your monthly repayment – including fees and interest – is then calculated as a percentage of each card transaction, which means the amount will vary from month to month.
| Pros | Cons |
| Repayment terms are more flexible as they depend on your card sales. | The fee structure can make this an expensive way to borrow. |
| You could qualify with poor credit as eligibility is based mostly on card sales. | Repayments will cut into your future cash flow and you may feel the pressure during quiet periods. |
How much does it cost?
Merchant cash advances work slightly differently to standard loans, as the cost is generally given as a funding or factor fee. This is typically around 1.2 to 1.5 times the total amount you borrow, so if you borrow £10,000 with a 1.3 factor rate you would repay £13,000.
Is my business eligible?
MCAs are aimed at businesses that handle regular debit and credit card takings, as lenders assess your eligibility based on your record of card payments and revenue. You’ll often need to have a minimum trading history, and most lenders will have a minimum monthly card transaction volume.
» COMPARE: Merchant cash advance
Business lines of credit
A business line of credit gives you access to a set credit limit. You can borrow as much or as little as you need up to that limit and you’ll only pay interest on what you borrow. If you have a revolving line of credit, you’ll be able to reuse credit as you repay it.
A business line of credit can be both unsecured or secured against an asset as collateral. Unsecured credit lines are likely to come with higher interest rates, but secured credit lines leave your asset at risk if repayments aren’t met.
| Pros | Cons |
| You’ll have flexible access to funds when you need them. | The line of credit may have a fixed end date, at which point you will need to reapply. |
| You’ll only pay interest on what you borrow. | As a result of this flexibility, you may need to pay a higher rate of interest. |
How much does it cost?
A business line of credit will only charge you interest on the amount you use, rather than the full limit – similar to credit cards and overdrafts. There might be charges involved, and some lenders may charge a fee per transaction, instead of interest.
Is my business eligible?
Lenders will have their own eligibility requirements, but will usually consider your business turnover, trading history, credit score and business forecasts.
Business overdrafts
A business overdraft works similarly to a standard overdraft on a current account, in that your business will be able to enter a negative balance up to an agreed limit. It can be a useful solution for short-term gaps in cash flow, though you will usually need to pay interest or fees based on how much you use.
| Pros | Cons |
| It can be a flexible safety net for unexpected costs and gaps in cash flow. | Interest rates can be relatively high compared to other forms of business finance. |
| You’ll only be charged for what you use, not the full amount available. | Banks can demand repayment at any time. |
| Once set up, funds are available immediately. | You could enter a debt cycle if overused. |
How much does it cost?
You’ll generally only pay interest on the amount you use, rather than your full overdraft, though there may also be fees involved depending on your bank. Keep in mind interest costs on your overdraft can be higher than average with traditional loans.
Is my business eligible?
The availability of a business overdraft will depend on affordability and risk, just like any other loan or credit product. Lenders will assess your credit history and turnover, and this will inform your overdraft limit, and how much it will cost to borrow.
» COMPARE: Best business bank accounts
Business credit cards
A business credit card can help with everyday spending and short-term cash flow. If you repay your balance in full every payment period, you could avoid paying any interest.
Business credit cards can also be used for money transfers, so you can access a lump sum; balance transfers, to move debt over to a different account often with lower interest; or cash withdrawals – but these all come with separate, often higher fees.
| Pros | Cons |
| A flexible solution for day-to-day costs. | Interest can be expensive if you don’t repay in full. |
| It can build your business credit rating if used responsibly. | Some cards charge annual or monthly fees for usage. |
| A business credit card can help you to develop a credit history for your business. | Debt can quickly accumulate if you don’t repay in full each month. |
How much does it cost?
The cost of a business credit card is given as the representative APR, which combines the credit card interest rate with any fees to give you the true overall borrowing cost. However, you can potentially avoid paying any interest so long as you pay off what you owe full each month.
Is my business eligible?
Most lenders will require that you be a business owner, sole trader, partner, or limited company director, while requirements for turnover or business credit are likely to vary by provider.
» COMPARE: Business credit cards
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What are the alternatives to a working capital loan?
Startup loans
Startup loans are designed for small businesses that have been trading for less than three years, who might otherwise struggle to secure finance. This type of loan can give you working capital to cover day-to-day expenses as well as major purchases, while also helping you build your business credit score so getting funding is easier in the future.
Best for: Startups that might struggle to secure funding.
» COMPARE: Startup loans
Bad business credit loans
Businesses or business owners with poor or limited business or personal credit scores will have limited options when it comes to securing finance. As a result, these loans often have higher than average interest rates and lower lending limits. Some may also require an asset as security, or a personal guarantee, but they may offer the opportunity to build your business credit score up.
Best for: Businesses with a poor or limited credit history.
» COMPARE: Bad business credit loans
Asset financing
If you need funding to buy assets for your business you could consider asset financing. Depending on the type you choose, this can let you spread the cost of an asset over monthly payments or rent the asset from a lender who buys it outright.
Best for: Businesses that want to spread the cost of expensive equipment.
» COMPARE: Asset finance loans
Working capital loans FAQs
This depends on the provider and the type of working capital loan. Some providers will also consider your turnover and debt-to-income (DTI) ratio, while invoice financing is more dependent on the credit worthiness of your customers.
Along with proof of your identity and address, you are likely to need to provide bank statements, financial accounts and tax returns. Depending on the type of loan you may also need a business plan.
This varies between lenders and the type of finance. For example, merchant cash advances and invoice finance can sometimes provide funds within 24 hours. Some lenders also offer short-term loans on a similar time scale.
Working capital loans are typically used to cover everyday expenses including payroll, stock or rent, as well as covering unexpected costs or bridging cash flow gaps.
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