Working capital loans for UK businesses

Working capital is current assets (cash, money owed by customers, stock) minus current liabilities (supplier bills, wages, tax and debt due within a year). Many profitable businesses still run short because of timing: if you pay suppliers before your customers pay you, or hold stock for months before it sells, cash is tied up. The longer that gap, the more working capital you need. Our guide to calculating working capital works through the numbers and the cash conversion cycle.

The lender provides funds that you repay over a shorter term than a standard business loan; the exact term varies by lender, product and case. Some are fixed loans with regular repayments; others are flexible facilities you draw on and repay as cash comes in. They can be unsecured with a personal guarantee, or secured against assets, invoices or card takings.

Limited companies, LLPs, partnerships and sole traders can all access working capital finance, though choice varies by lender. Most lenders assess:

• trading history, turnover and profitability
• recent business bank statements and the pattern of cash in and out
• filed accounts and up-to-date management figures
• your debtor book (for invoice finance) or card takings (for a merchant cash advance)
• existing borrowing, and business and personal credit history
• what the funds are for and how they will be repaid

Businesses with weaker credit may still find options, particularly invoice finance, where the lender relies heavily on the quality of your customers.

Two lenders can reach different answers on the same working capital case. A bank may want filed accounts showing profit and may ask for security, while a specialist funder may lean more on recent bank statement conduct, or on the spread and quality of the debtor book for invoice finance. Sector appetite and the size of the facility also change which lenders are worth approaching.

Most working capital finance for smaller businesses is unsecured against property but backed by a personal guarantee from the directors. The detail depends on the product. Unsecured short-term loans and tax loans usually rely on a guarantee, and larger facilities may add a debenture over the company. Invoice finance is secured on the debtor book, normally with a debenture and a director's warranty and indemnity covering the validity of invoices. A merchant cash advance relies on your future card takings, and some providers take only a performance guarantee. A revolving facility from a bank may come with a debenture and covenants. If you would rather not give a guarantee, see business loans without a personal guarantee for what lenders may accept instead.

Working capital loans are among the quicker facilities to arrange, typically taking from a few working days for a straightforward unsecured loan to two or three weeks for a revolving or invoice-based facility. Lenders that assess through open banking or recent bank statements can move fastest. Invoice finance takes longer to set up because the funder checks the sales ledger, debtor concentration and customer contracts before the first advance, although later drawings are then quick. Facilities with a debenture or covenants take longer for legal work. The things that slow most cases are missing management accounts, an out-of-date aged debtor list and unexplained transactions on bank statements. Timescales depend on the lender and the case, so apply before the cash gap arrives rather than in the week wages are due.

The main alternatives to borrowing for working capital are releasing cash already tied up in the business, spreading a specific liability, or changing payment terms. Asset refinancing raises cash against vehicles and machinery you own outright. Where the pressure is a tax bill, an HMRC Time to Pay arrangement may be cheaper than new borrowing. Tightening credit control and chasing overdue invoices, covered in our guide to late payment, can shorten the cash gap without any finance at all. Negotiating longer supplier terms, or using supply chain finance where a large customer offers it, are other routes worth weighing before you borrow.