
How to calculate working capital: formula, ratios and cycle
To calculate working capital, add up current assets (cash, trade debtors, stock and prepayments) and subtract current liabilities (supplier bills…
How working capital loans bridge the gap between paying suppliers and getting paid, the six main types compared, typical costs and what lenders look for.
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In short
A one-off, known shortfall suits a short-term loan; gaps that recur unpredictably suit a revolving credit facility; slow-paying trade customers point to invoice finance; and card-heavy businesses may use a merchant cash advance. Lenders mainly check bank statement conduct, trading history and affordability, and the finance is meant for timing gaps rather than long-term investment.
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About working capital loans
A working capital loan is short-term finance used to pay a business's day-to-day running costs, such as wages, rent, suppliers, stock and tax, when cash coming in does not line up with cash going out. It is for trading businesses that are fundamentally sound but have money tied up in stock, unpaid invoices or a contract that has not yet paid out. It is not intended for long-term investments like property. As a broker, Smart Funding Solutions searches a panel of 300+ lenders for the facility that fits how cash moves through your business, whether that is a fixed loan, a revolving line or an invoice-based facility.
Funding needs
Seasonal businesses in hospitality, retail, agriculture and construction use working capital finance to smooth predictable peaks and troughs.
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A transaction we arranged
£150,000
£150K requirement. Two repayment structures. One solution.
We split the facility: £78,000 repaid over five years and £72,000 interest-only, so repayments fitted how the business runs.
Read the transaction
More detail on specific needs within this topic.

To calculate working capital, add up current assets (cash, trade debtors, stock and prepayments) and subtract current liabilities (supplier bills…
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:
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.

| Advantages | Disadvantages |
|---|---|
| Keeps the business running through timing gaps without giving up equity | Usually more expensive than long-term secured borrowing |
| Many facilities can be arranged quickly | Personal guarantees are common |
| Flexible products let repayments follow cash flow | Not suited to major capital purchases |
| Helps you take on larger orders or contracts | Using credit to cover persistent losses only delays the problem |
How the main business finance structures work. Lenders set their own terms, so treat this as a guide to the questions to ask.
| Option | How you repay | Security | Often used for |
|---|---|---|---|
| Unsecured business loan | Fixed instalments, usually monthly | No charge over assets; a personal guarantee is usually required | Growth, stock, tax bills and cash flow |
| Secured business loan | Fixed instalments, often over a longer term | A charge over property or other assets | Larger sums, property and refinancing |
| Revolving credit facility | Interest on what you draw; repay and redraw | Varies by lender and case | Recurring or uneven cash flow gaps |
| Merchant cash advance | A share of future card takings | No charge over assets | Card-taking businesses with uneven months |
| Asset finance | Regular payments over the life of the asset | The asset being financed | Equipment, vehicles and machinery |
| Invoice finance | Settled as customers pay their invoices | Your unpaid invoices | Businesses waiting on customer payment |
General information only. Every lender has its own criteria, and all finance is subject to status.
Pricing depends on the type of facility, whether it is secured, your trading history, credit record, and the amount and term. Secured and asset-backed facilities are usually cheaper than unsecured ones. As well as interest, check for arrangement fees, non-utilisation fees on credit lines, service fees on invoice finance and any early repayment charges. Compare the total cost, not just the rate.
Working capital loans sit within our wider range of cash flow finance.
Illustrative figures from the numbers you enter, before you speak to a lender.
A term loan is a lump sum repaid in fixed instalments, often over several years, and can fund long-term investments. Working capital finance covers short-term running costs and is usually repaid within a shorter period. Some working capital products, such as revolving credit, can be drawn and repaid repeatedly rather than taken as one sum.
It is harder without trading history, because lenders use bank statements and accounts to judge affordability. Once a business has some months of trading, more options open up. New businesses may also consider start up business loans, or asset finance for equipment, which frees other cash for day-to-day running costs.
Working capital finance is typically arranged from £10,000 to £10 million. The amount a lender offers depends on your turnover, bank statement conduct, existing borrowing and the type of facility. With invoice finance the limit follows the value and quality of your debtor book, and with a merchant cash advance it reflects your card takings, so the right product can change how much is available.
Yes, covering a VAT or other tax bill at an awkward time is a common use of working capital finance. A dedicated VAT loan spreads the bill over monthly payments, while a short-term loan or revolving facility can also cover it. An HMRC Time to Pay arrangement may be cheaper in some cases, so it is worth comparing both. Our page on VAT loans explains how tax funding works.
A working capital loan is designed for timing gaps in a fundamentally sound business, not for covering ongoing losses. If costs consistently exceed income, borrowing only delays the problem and adds repayments to the pressure. Lenders will also look at profitability and affordability, so persistent losses narrow the options. In that situation it is usually better to address pricing, costs or credit control first, or take advice on restructuring existing debt.
A fast-scaling national training provider needed £600,000. Further funding followed as it grew, including a £400,000 facility.
A growing recruitment agency needed funding that moved with its debtor book, not another fixed loan. We arranged confidential invoice finance.

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