A business’s working capital requirement is determined by the turnover of the business, and the length of time between paying suppliers and getting paid by its customers. So, as a business grows, this requirement grows, and so it makes sense that this growth is financed, rather than using more of the business’s own cash.
Types of Working Capital Finance
Overdrafts are one of the easiest forms of borrowing for businesses. Since the overdraft limit is added to a business account, there is no separate drawdown process, so the business only pays interest on what it requires.
This form of finance accelerates cash into your business, allowing you to draw down funds as soon as you have invoiced a customer, rather than wait for your customer to pay. It’s a very common and sensible way to fund working capital and the facility Go to our Invoice Finance page for more information.
Trade Finance is generally used to fund international trade, where the longer transportation times and value of transactions is higher. It can also be used to fund domestic trade, where the value of purchases or sales is large enough (over £10k). The various types of trade finance products are covered in our trade finance page (link).
Supplier finance can extend your payment terms with selected suppliers. The lender will pay your supplier and provide finance for typically 1-6 months, before you pay back the lender.
Revolving Credit Facilities
These operate as an agreed line of credit between a business and its lender. It operates much like a credit card, in that a business can draw down an amount within the agreed limit and when it’s paid back, unlike a traditional loan, the same agreed amount is available to draw again.
If, as part of its usual business activity, a business holds a large amount of stock for several months, stock finance may be an appropriate way to fund a significant part of the working capital requirement. Typically, stock values would need to exceed £1m and be held for more than six months.
Short term loans (typically a couple of months) can be put in place to cover an outgoing payment to a supplier or perhaps a VAT or tax payment. If the funding requirement is a one-off, and the company can predict that it will be back in credit at an agreed time in the future, then a term loan can be the most appropriate form of finance.