Your guide to working capital finance in 2024
Do you need to increase working capital at your business? Read this article to find out what working capital finance is and how to apply for it.
Struggling to balance your working capital at your business?
From seasonal fluctuations to increased expenses, many factors can throw off your asset-to-liability ratio, causing your working capital to diminish. Luckily, working capital finance solutions offer you convenient access to crucial funds that can help maintain your day-to-day operations.
What is working capital finance?
Working capital finance refers to business financing designed to cover your short-term operational expenses. Oftentimes, businesses leverage working capital finance to fund specific growth projects, for example, major contracts or expansion into new markets.
With a working capital finance solution, your business can bridge the gap between your short-term funding and your operational efficiency. Working capital finance enables you to maintain a steady cash flow so you can seize growth opportunities when they arise and navigate financial fluctuations with ease.
Types of working capital finance
Working capital loans: Working capital loans often span a short term and help boost your immediate cash flow. The amount of a working capital loan depends on your financial needs and creditworthiness. Secured working capital loans require you to put assets up as security, while unsecured business loans do not require security but do require a better credit rating.
Overdrafts: Business overdrafts are financial agreements that enable you to withdraw more money than is available within an approved limit. While obtaining a business overdraft via a traditional bank can be difficult, plenty of alternative finance providers offer flexible business overdraft solutions. However, keep in mind that business overdrafts often have low credit limits.
Revolving credit facilities: A revolving credit facility is a flexible financing arrangement that offers a predetermined credit limit similar to a credit card, with interest charged only on the amount utilised. Revolving credit facilities don’t require a specific bank account with the provider, allowing you to direct the money where you need it.
Invoice finance: If you offer credit terms to your customers, invoice finance is a good way of unlocking working capital in the short term. The amount you borrow is, by definition, limited by the value already owed to you via customer invoices, making this a good option for increasing cash flow but not necessarily the right option if you require a significant amount of funding. Invoice finance is only as good as the strength of your debtors, customers will have to change the account they pay into, and it can be admin heavy.
Trade finance and supply chain finance: Both trade and supply chain finance are designed for businesses that focus on physical stock rather than services rendered. Supply chain finance allows buyers to delay payment while suppliers get immediate payments from lenders. Trade finance is more complex, facilitating international trade and often involves prepayment arrangements.
Asset refinancing: Asset refinancing – also known as asset-based lending or asset-backed financing – uses the value of an existing asset, such as equipment, property, or accounts receivable, as collateral to secure a loan or line of credit. If you can’t get enough funding via an unsecured business loan, asset refinancing is a good option to gain more funds. Asset finance typically requires an upfront deposit and there is less flexibility with early repayments.
Merchant cash advances: A merchant cash advance provides you with a lump sum of capital upfront in exchange for a percentage of future credit card sales or daily bank account deposits. If your business accepts payment from customers using card terminals, a merchant cash advance is a useful way to increase working capital.
Tax bill and VAT funding: If your tax bill is straining your working capital, there is funding available specifically designed for paying VAT or corporation tax. Getting a loan for your tax bill allows you to spread the costs over 3 to 12 months, providing you with increased cash to cover other operational expenses.
How can I calculate my working capital?
Before you can determine your funding needs, you need clear oversight of your current working capital.
To calculate your working capital, subtract your current liabilities from your current assets. Your working capital assets to liabilities ratio should fall between 1.2 to 2.0. A ratio below a 1.0 can indicate cash flow problems to your accounting team and investors.
For example, if you have £5,000 in the bank, a customer that owes you £4,000, an invoice from a supplier payable for £2,000, and a VAT bill worth £4,000, your working capital would be £3,000.
Here’s a breakdown of that equation: Assets (5,000 + 4,000) – Liabilities (2,000 + 4,000) = 3,000
What can I use working capital finance for?
Short-term expenses: You can use working capital finance to bridge the gap between receiving payment from customers and making payment for monthly costs like payroll, rent, or inventory.
Seasonal variations: Working capital finance can help improve cash flow, for example, if you are a retail business, you might use this type of financing to stock up on inventory in advance of a busy period.
Growth: If a growth opportunity surfaces, for example, the ability to take on a bigger project or the chance to expand into a new market, you can use working capital finance to facilitate this.
Who should use working capital finance?
Different businesses require different amounts of working capital based on their individual expenses, assets, and liabilities. For instance, a retail business requires lots of available cash for purchasing inventory and maintaining a storefront, while a tech company operating remotely might not have the same regular costs.
Ultimately, determining if you need working capital finance comes down to your working capital balance. If you find your liabilities often outweigh your assets, you might need a working capital boost.
How to apply for working capital finance in the UK
At Funding Options by Tide, we help businesses gain the working capital they need to thrive.
Funding Options by Tide matches you with more than 120 lenders, allowing you to compare different loans and financing options to find the best solution for your business.
Get started today to see your funding options.
Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.
It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.
Short-term lending can lead to financial difficulty and is not suitable for everyone. Contact us for support if you ever face difficulties making your repayments. Warning: Late repayment can cause you serious money problems. For help go to moneyhelper.org.uk
Funding Options is a part of Tide. If you proceed, you’ll be redirected to Tide.
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Your guide to working capital finance in 2024
Do you need to increase working capital at your business? Read this article to find out what working capital finance is and how to apply for it.
Funding Options is a part of Tide. If you proceed, you’ll be redirected to Tide.
This quote won't affect your credit score
Get access to 120+ lenders
Struggling to balance your working capital at your business?
From seasonal fluctuations to increased expenses, many factors can throw off your asset-to-liability ratio, causing your working capital to diminish. Luckily, working capital finance solutions offer you convenient access to crucial funds that can help maintain your day-to-day operations.
What is working capital finance?
Working capital finance refers to business financing designed to cover your short-term operational expenses. Oftentimes, businesses leverage working capital finance to fund specific growth projects, for example, major contracts or expansion into new markets.
With a working capital finance solution, your business can bridge the gap between your short-term funding and your operational efficiency. Working capital finance enables you to maintain a steady cash flow so you can seize growth opportunities when they arise and navigate financial fluctuations with ease.
Types of working capital finance
Working capital loans: Working capital loans often span a short term and help boost your immediate cash flow. The amount of a working capital loan depends on your financial needs and creditworthiness. Secured working capital loans require you to put assets up as security, while unsecured business loans do not require security but do require a better credit rating.
Overdrafts: Business overdrafts are financial agreements that enable you to withdraw more money than is available within an approved limit. While obtaining a business overdraft via a traditional bank can be difficult, plenty of alternative finance providers offer flexible business overdraft solutions. However, keep in mind that business overdrafts often have low credit limits.
Revolving credit facilities: A revolving credit facility is a flexible financing arrangement that offers a predetermined credit limit similar to a credit card, with interest charged only on the amount utilised. Revolving credit facilities don’t require a specific bank account with the provider, allowing you to direct the money where you need it.
Invoice finance: If you offer credit terms to your customers, invoice finance is a good way of unlocking working capital in the short term. The amount you borrow is, by definition, limited by the value already owed to you via customer invoices, making this a good option for increasing cash flow but not necessarily the right option if you require a significant amount of funding. Invoice finance is only as good as the strength of your debtors, customers will have to change the account they pay into, and it can be admin heavy.
Trade finance and supply chain finance: Both trade and supply chain finance are designed for businesses that focus on physical stock rather than services rendered. Supply chain finance allows buyers to delay payment while suppliers get immediate payments from lenders. Trade finance is more complex, facilitating international trade and often involves prepayment arrangements.
Asset refinancing: Asset refinancing – also known as asset-based lending or asset-backed financing – uses the value of an existing asset, such as equipment, property, or accounts receivable, as collateral to secure a loan or line of credit. If you can’t get enough funding via an unsecured business loan, asset refinancing is a good option to gain more funds. Asset finance typically requires an upfront deposit and there is less flexibility with early repayments.
Merchant cash advances: A merchant cash advance provides you with a lump sum of capital upfront in exchange for a percentage of future credit card sales or daily bank account deposits. If your business accepts payment from customers using card terminals, a merchant cash advance is a useful way to increase working capital.
Tax bill and VAT funding: If your tax bill is straining your working capital, there is funding available specifically designed for paying VAT or corporation tax. Getting a loan for your tax bill allows you to spread the costs over 3 to 12 months, providing you with increased cash to cover other operational expenses.
How can I calculate my working capital?
Before you can determine your funding needs, you need clear oversight of your current working capital.
To calculate your working capital, subtract your current liabilities from your current assets. Your working capital assets to liabilities ratio should fall between 1.2 to 2.0. A ratio below a 1.0 can indicate cash flow problems to your accounting team and investors.
For example, if you have £5,000 in the bank, a customer that owes you £4,000, an invoice from a supplier payable for £2,000, and a VAT bill worth £4,000, your working capital would be £3,000.
Here’s a breakdown of that equation: Assets (5,000 + 4,000) – Liabilities (2,000 + 4,000) = 3,000
What can I use working capital finance for?
Short-term expenses: You can use working capital finance to bridge the gap between receiving payment from customers and making payment for monthly costs like payroll, rent, or inventory.
Seasonal variations: Working capital finance can help improve cash flow, for example, if you are a retail business, you might use this type of financing to stock up on inventory in advance of a busy period.
Growth: If a growth opportunity surfaces, for example, the ability to take on a bigger project or the chance to expand into a new market, you can use working capital finance to facilitate this.
Who should use working capital finance?
Different businesses require different amounts of working capital based on their individual expenses, assets, and liabilities. For instance, a retail business requires lots of available cash for purchasing inventory and maintaining a storefront, while a tech company operating remotely might not have the same regular costs.
Ultimately, determining if you need working capital finance comes down to your working capital balance. If you find your liabilities often outweigh your assets, you might need a working capital boost.
How to apply for working capital finance in the UK
At Funding Options by Tide, we help businesses gain the working capital they need to thrive.
Funding Options by Tide matches you with more than 120 lenders, allowing you to compare different loans and financing options to find the best solution for your business.
Get started today to see your funding options.
Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.
It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.
Short-term lending can lead to financial difficulty and is not suitable for everyone. Contact us for support if you ever face difficulties making your repayments. Warning: Late repayment can cause you serious money problems. For help go to moneyhelper.org.uk