Working capital loans

What are working capital loans and how can I apply for one?

Many businesses experience times when money is limited. Some businesses experience this issue frequently due to their varying sales cycles. But regardless of how often or infrequent this problem is, having insufficient working cash to support regular operations and promote expansion is bad for all businesses.

A fast, easy, and flexible way to keep your firm operating at full throttle is to apply for business finance via a working capital loan. Thankfully, there is a cure to short-term financial difficulty.

Apply for a working capital loan

Request a call back

How does it work?

Fill in our form​

A member of the team will be in touch to collect some basic information. This helps us understand the type of funding that would best suit your business.

We find the best funding for you

We use the information you provided to source the best funding options for you and your business using our panel of over 250 lenders.

We present your options

We’ll then present you will all of the funding options available to you and give you time to decide which one you would like to proceed with.

Working capital definition

Working capital is a measurement of a company’s finances and short-term financial well-being. It is the difference between a company’s current assets and liabilities. Cash, accounts receivable, and inventories of raw materials and completed goods are examples of current assets. Among the current obligations are debts and accounts payable.

Assets that are worth more than liabilities are said to have positive working capital. This typically indicates that there is sufficient cash on hand to finance continuing operations as well as growth investments. Negative working capital, which occurs when obligations exceed assets and there is no excess cash, denotes inadequate liquidity and may be interpreted as an indication that the business is unable to fully fund its ongoing operations or could even be in danger of bankruptcy.

Exactly how is working capital determined?

A company’s working capital is determined by deducting its entire current assets from its total liabilities. Cash, accounts receivable, inventory, and other assets that are anticipated to be sold or converted into cash in less than a year are considered current assets.

Accounts payable, wages, taxes owed, and the current portion of long-term debt that is due within a year are all examples of current liabilities.

Positive working capital is what is found if there is an excess of assets. Negative working capital is what happens when the results show that there are more obligations than assets.

Working capital efficiency: what is it?

In contrast to how quickly a company must pay its suppliers for the same stocks or services, working capital efficiency measures how quickly a company can turn available goods or services into sales. The cash conversion cycle is another name for this process. The more quickly a business can sell a product or provide a service compared to the time it needs to pay for it, the more effectively it uses its working capital.

Poor working capital efficiency can be shown in cash that is held too long in pre-paid services or inventories that are stored. Businesses with strong working capital efficiency may typically borrow money from lenders more readily and set aside more money for expansion investments.

What is a loan for working capital?

Loans for working capital supply funds to pay for a business’s ongoing running costs. They are tools for short-term debt and not for long-term debt or investments like the purchase of equipment or real estate. Working capital loans are advantageous since many businesses have varying incomes throughout the year, and they are often repaid in a year or less.

This is particularly true for companies that operate seasonally, as they experience both extended periods of weak sales and brief periods of high sales. Businesses with changing sales cycles frequently require a working capital loan to pay these costs during slow periods because many costs, such as wages, rent, utilities, and material or inventory purchases, are fixed.

Find out more

Request a call back

How does it work?

Fill in our form​

A member of the team will be in touch to collect some basic information. This helps us understand the type of funding that would best suit your business.

We find the best funding for you

We use the information you provided to source the best funding options for you and your business using our panel of over 250 lenders.

We present your options

We’ll then present you will all of the funding options available to you and give you time to decide which one you would like to proceed with.

How do they function?

Working capital loans provide businesses with the money it needs to fund daily operations and cover costs such as salaries, rent, utilities, supplies, inventory, and ancillary services. Capital financing loans are typically repaid in 3-24 months and can be either secured or unsecured. Secured loans are often simpler to get since the borrower pledges property as insurance against loss on the lender’s part. Unsecured loans are received without putting up any security and are determined by the credit rating and financial standing of the firm.

Term loans, business lines of credit, business credit cards, merchant cash advances, and invoice financing are just a few of the different sizes and forms of working capital loans available in the UK.

Various working capital loan types

Term loan: A one-time payment that must be repaid with interest over a predetermined period in regular instalments. A secured or unsecured loan is possible.

Revolving credit facilities: With this type of business finance, the borrower can take money out and repay it from a flexible loan account, similar to business overdrafts. The maximum amount of credit that may be borrowed and any minimum payment requirements must both be met. This is a flexible business loan option as some lenders offer interest-only repayments, over a fixed term.

Credit cards are issued in the name of a business that has a set borrowing limit. Usually unsecured, but frequently has higher fees and interest rates.

A merchant cash advance is a loan secured by credit card sales that are repaid as a percentage of weekly or monthly card sales. Suitable for companies that primarily accept credit or debit cards from customers. The lender receives security from card sales, and you can typically borrow more money if your card sales turnover is bigger. Most of the time, no further collateral is needed.

Vat loans: Here at Smart Funding Solutions, as a credit broker we help many businesses spread the cost of any VAT owed to HMRC, over fixed, affordable monthly repayments. Helping aid cash flow through the business, which can be ploughed into areas of growth and expansion. Once set up, it acts as a revolving credit facility, renewing every quarter, in line with monies owed to HMRC.

Recovery Loan Scheme: Many UK businesses used the government-backed loan scheme to get themselves back on track during and after the covid-19 pandemic. Using a capital ratio of up to 25% of your 2019 annual turnover, this loan scheme provided a much needed cash flow boost to keep many UK businesses afloat

Invoice Financing: The business borrows against the value of its pending accounts receivable or sells them (unpaid customer invoices). The invoices offer the lender security. Most of the time, no further collateral is needed.

What is the loan amount?

Working capital loans range from £5k to £25m, but your ability to borrow will depend on several factors, including your gross revenue, the length of time your business has been in operation, your business credit score, the industry you operate in, the type of borrowing you select, and whether the loan is secured or unsecured. Contact Smart Funding Solutions to talk about your borrowing requirements and decide which loan option is ideal for your company.

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What can I do with the money?

Loans for working capital are used to cover general business expenses. They can therefore be applied to practically any situation to benefit the success of your company. Working capital loans can be used to pay for a variety of expenses including labour, rent, taxes, utilities, repairs, inventory expansion, material purchases, marketing costs, and more. They are typically utilised during times when income is lowered but costs are stable or even rising.

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What are the average interest rates for loans for working capital?

The type of working capital loan you select and whether it is secured or unsecured will affect the interest rate. (Loans with security typically have reduced fees and interest rates.) Current rates for term loans range from 1.8% to 45%, for business credit cards from 9.9% representative APR, and invoice financing from 0.6%.

Advantages and Disadvantages of a working capital loan

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Advantages

Although practically every firm experiences times when its available working capital is limited, working capital is essential for corporate growth (but the bills must still be paid). A working capital loan can eliminate a company’s cash flow hiccups and increase its chances of success.
Principal benefits of a working capital loan:
Loans for working capital are typically easy to get, sometimes in as little as 24 hours. This enables business owners to quickly meet their immediate financial needs.
You can receive some working capital loans without putting up any security.
Owners of businesses are not obligated to cede ownership or control of their company.
In most cases, lenders can adjust loan payments to the company’s cash flow, preventing increased financial stress during periods of low activity.

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Disadvantages

Working capital loans have few drawbacks in comparison to their benefits:
Interest rates on working capital loans are typically higher than those on other types of debt financing since they are typically offered without security or with minimal collateral requirements.
For companies with little or no history of cash flows, a working capital loan might be based on the personal credit of the firm owner. The person’s credit score could be impacted by missed payments or default.
Short-term working capital loans with higher interest rates are inappropriate for financing significant capital expenditures.

What distinguishes term loans or cash credit from working capital loans?

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What distinguishes term loans from working capital loans?

A term loan is an upfront quantity of money obtained that must be repaid with consistent instalments over a predetermined time. This is a working capital loan, technically.
However, some lenders and borrowers classify term loans differently because they are not flexible (after receiving the initial lump payment, the borrower cannot re-borrow the same cash repeatedly like a line of credit).
Additionally, term loans can be repaid over considerably longer periods—anywhere from one to thirty years—than working capital loans, which typically have shorter terms and can be returned in a year or less.
Both loan forms could ask the borrower to put up collateral as security.

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What distinguishes cash credit from working capital loans?

Like an overdraft, cash credit is a bank loan product that makes extra money available to the company as needed.
Contrary to an overdraft, which is simply an open agreement between the bank and the customer to allow the customer’s bank account to go negative, cash credit is a separate account that can supply emergency funds on demand. This account is frequently referred to as a “cash reserve account.”
Money is sent to the customer’s current account when the consumer “calls” money from the cash credit account. Cash credit accounts are different from most other working capital loans in that they frequently require the borrower to provide collateral, do not have a set due date for repayment, and typically carry daily interest charges.

I have bad credit. Can I still acquire a working capital loan?

Yes. Working capital loans are available for all types of businesses, regardless of their credit history. Even if you’ve been rejected by other lenders, it might still be possible to secure the funding your company needs to thrive. Learn more about our working capital loans for companies with poor or no credit history by registering with us.

Can a small business or startup obtain a working capital loan?

Yes. There are a variety of borrowing options available for small firms and single proprietors, as well as specialised working capital loans for new businesses. There is a working capital loan to suit your demands, regardless of the industry you work in, how far along you are in your entrepreneurial path, or how long your small business has been in operation.

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The loans are unsecured or secured?

Loans for working capital can be obtained with or without putting up security. Other loan products, such as merchant cash advances, have security built in because they are based on the borrower’s customer credit card activities. Some loan products, like business credit cards, can typically be obtained unsecured. Term loans and business lines of credit may or may not demand collateral. Whether or not security is required depends depend on your company’s financial history, the amount you desire to borrow, and the type of loan you select.

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Balance sheet loans for working capital

Working capital loans, as opposed to long-term asset-purchase loans like commercial mortgages, are made to cover sudden drops in a company’s cash flow. They produce a liability on the balance sheet as debt, but they also produce an asset on the ledger as cash. This equivalence holds true even as the borrowed money is used to pay for continuing business expenses. The amount of cash on the asset side of the ledger may be decreasing, but so are the liabilities that the money is used to pay off. As a result, loans for working capital are neither true assets nor true liabilities. They function as a self-cancelling payment system.

What paperwork is needed?

Depending on how much you want to borrow and the kind of business you run, several types of documentation
may be needed to get a working capital loan. Among the more frequently needed documents are:

The documentation you must provide depends depend on the sort of loan you are applying for; for instance, a merchant cash advance requires different paperwork than a company line of credit. Finally, lenders will analyse your company credit and perhaps the business owner’s personal credit.

Want to find out more or apply?

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Is my company qualified?

Your company is almost probably qualified for a working capital loan or cash flow loans, regardless of whether it is a start-up or an established SME, operating in retail, hospitality, manufacturing, construction, automotive, farming, transport, or many other industries. Additionally, businesses that give extended credit to their consumers or have seasonal sales seasons are well-suited for this kind of financial help.

Where can I apply?

A working capital loan might make things easier if you require quick cash to expand your business, pay for repairs, pay employees’ salaries, pay taxes, or buy merchandise. Start with a single straightforward application for an unsecured business loan or a secured business loan. We can help facilitate finance products and funding options for a limited company, partnership or sole trader businesses in the UK with a registered office.

Smart Funding Solutions are authorised and regulated by the financial conduct authority, FRN: 972740.

Frequently Asked Questions

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A Working Capital Loan is a type of loan made to businesses to cover its operational expenses such as wages, rent, and debt payments. These loans are not meant for purchasing long-term assets or investments but are intended for day-to-day business operations.

A lender provides a specified amount of funds to a business, which the business then repays over an agreed period of time, together with any applicable interest and fees.

Any operating business that has short-term financial needs to maintain its daily operations can apply for a Working Capital Loan, subject to meeting the lender’s eligibility requirements.

The amount you can borrow depends on several factors such as the operational expenses of your business, your credit history, and the lender’s policy. Loans can range from a small sum up to a substantial amount.

Approval times can vary depending on the lender and the specifics of your application. Online lenders may offer faster decision-making processes compared to traditional banks.

Interest rates for Working Capital Loans can range widely based on factors such as your creditworthiness, the length of the loan, and the lender’s terms. Understanding and comparing offers from different lenders is key to securing the best rates.

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Lenders generally require proof of your business’s operational cost structure, financial statements, and good credit history to ensure you are a good candidate for a Working Capital Loan.

Working Capital Loans are designed to handle day-to-day operating expenses and not intended for long-term investments or purchasing assets.

Repayments are usually made in regular instalments over the agreed loan term, each comprising a portion of the principal loan amount plus accrued interest.

This depends on the specific agreement with the lender. Some lenders may allow early repayment but may also apply early repayment fees. It’s important to understand these terms ahead of accepting the loan.

Failure to repay a loan can lead to increased fees, serious damage to your credit history, and possibly legal repercussions. If you’re struggling with repayments, it’s advised to contact your lender as soon as possible to discuss solutions.

If your business is seeking short-term financial assistance to maintain daily operations, a Working Capital Loan can be an excellent solution. However, you should thoroughly consider terms, interest rates, and your repayment capacity before making a final decision.

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