Working capital finance provides the short-term funding a business needs to cover its day-to-day operating expenses – paying suppliers, meeting payroll, holding stock and bridging the gap between spending money and receiving payment from customers. It is distinct from long-term finance used to buy assets or fund expansion.
Most businesses experience cash flow gaps at some point. Seasonal demand, long customer payment terms, large upfront stock purchases and growth itself all consume working capital. Understanding the finance options available helps you choose the right tool for your situation rather than defaulting to whatever your bank offers first.
For background on the concept, see our guide to working capital.
Overview of options
| Finance type | How it works | Typical cost | Speed of access | Best suited to |
|---|---|---|---|---|
| Business overdraft | Draw down as needed up to an agreed limit | 5-15% EAR + arrangement fee | Fast (if pre-arranged) | Short-term, unpredictable cash flow gaps |
| Invoice factoring | Sell your unpaid invoices to a factor for immediate cash | 1-5% of invoice value + service fee | Fast (once set up) | B2B businesses with long payment terms |
| Invoice discounting | Borrow against unpaid invoices (you retain collection) | 1-3% of invoice value + service fee | Fast (once set up) | B2B businesses wanting confidential finance |
| Revolving credit facility | Draw down, repay and redraw up to a limit | 4-12% + arrangement fee | Moderate | Ongoing, flexible working capital needs |
| Trade finance | Finance the purchase of goods from suppliers, often internationally | Variable (letters of credit, guarantees) | Moderate | Import/export and wholesale businesses |
| Asset-based lending | Borrow against the value of assets (debtors, stock, equipment) | Variable | Moderate | Businesses with significant tangible assets |
| Merchant cash advance | Advance repaid as a percentage of future card sales | Factor rate 1.1-1.5x | Very fast | Retail and hospitality with card payments |
| Supply chain finance | Supplier gets early payment; buyer pays on extended terms | Typically lower than invoice finance | Moderate | Large buyers with established supply chains |
Business overdraft
A business overdraft lets you spend more than the balance in your current account, up to an agreed limit. It is the most familiar form of working capital finance and suits short-term, unpredictable cash flow fluctuations.
Advantages:
- You only pay interest on the amount you use
- Flexible – draw down and repay as needed
- Familiar to most business owners and easy to understand
Disadvantages:
- The bank can reduce or withdraw the facility at short notice
- Interest rates are higher than term loans
- Not suitable for sustained working capital deficits
- Requires a good banking relationship and credit history
Overdrafts work for bridging temporary gaps – for example, covering payroll before a large customer payment arrives. If your overdraft is permanently drawn, you need a different solution.
Invoice finance
Invoice finance unlocks cash tied up in unpaid invoices. It comes in two main forms:
Invoice factoring
With invoice factoring, you sell your invoices to a factoring company. They advance 70-90% of the invoice value immediately, collect payment from your customer and pay you the remainder minus their fees.
| Element | Detail |
|---|---|
| Advance rate | 70-90% of invoice value |
| Discount charge | 1-5% annualised on the advanced amount |
| Service fee | 0.5-3% of turnover |
| Customer visibility | Customers know you use a factor (the factor collects) |
Invoice discounting
Invoice discounting works similarly but you retain control of credit collection. Your customers do not know you are using finance.
| Element | Detail |
|---|---|
| Advance rate | 75-90% of invoice value |
| Discount charge | 1-3% annualised |
| Service fee | Lower than factoring (you do the collection) |
| Customer visibility | Confidential – customers deal with you directly |
Invoice finance is particularly effective for businesses with strong invoicing volumes and creditworthy customers, because the finance is secured against the invoices themselves.
Revolving credit facility
A revolving credit facility (RCF) is a pre-agreed borrowing limit that you can draw down, repay and redraw as needed – similar to an overdraft but typically structured as a separate facility with different terms.
Key features:
- Agreed facility for 1-5 years (longer than a typical overdraft)
- Interest only on the drawn amount, plus a commitment fee on the undrawn portion
- Can be secured or unsecured
- More formal documentation than an overdraft
RCFs suit businesses that need ongoing, flexible access to working capital without the risk of an overdraft being withdrawn. They are common for businesses with seasonal fluctuations or project-based revenue.
Trade finance
Trade finance covers a range of products designed to fund the purchase of goods, particularly for businesses involved in international trade:
- Letters of credit – a bank guarantees payment to your supplier once certain conditions are met (e.g. proof of shipment)
- Documentary collections – the bank acts as intermediary, releasing documents to the buyer against payment
- Trade loans – short-term loans specifically for purchasing stock or materials
- Import finance – the bank pays your overseas supplier and you repay over an agreed period
Trade finance is particularly relevant for businesses importing goods with long lead times and paying suppliers before receiving payment from customers.
Asset-based lending
Asset-based lending (ABL) uses the value of your business assets as security for a borrowing facility. Assets can include:
- Trade debtors (receivables)
- Stock and inventory
- Plant, machinery and equipment
- Property
The lender assesses the value of your assets and provides a facility based on a percentage of that value. As your asset base grows, the facility can increase – making ABL well suited to growing businesses.
ABL is often structured as a combination of invoice finance (against debtors) and stock finance (against inventory), providing a single, integrated working capital facility.
Choosing the right option
| Your situation | Consider |
|---|---|
| Occasional, short-term cash gaps | Overdraft |
| Long customer payment terms (30-90 days) | Invoice factoring or discounting |
| Seasonal stock purchases | Trade finance or revolving credit |
| Rapid growth stretching cash flow | Asset-based lending or invoice finance |
| High card payment volumes, need fast cash | Merchant cash advance |
| Importing goods with long lead times | Trade finance (letters of credit, import finance) |
| Ongoing flexible needs across the year | Revolving credit facility |
Cost comparison
The true cost of working capital finance is not always obvious from the headline rate. Consider:
- Interest or discount rate – the annualised borrowing cost
- Arrangement and facility fees – upfront or annual charges for setting up the facility
- Service fees – ongoing charges (particularly for invoice finance)
- Minimum usage fees – some facilities charge a minimum even if you do not draw down
- Early repayment charges – penalties for repaying before the agreed term
- Personal guarantees – some lenders require directors to guarantee the facility personally
Always calculate the total cost of finance as a percentage of the amount you actually use, rather than comparing headline rates across different product types.
Applying for working capital finance
Lenders will typically want to see:
- Recent management accounts or filed statutory accounts
- Cash flow forecasts showing why the finance is needed and how it will be repaid
- Aged debtors and creditors reports (for invoice finance and ABL)
- Bank statements for the past 3-12 months
- Business plan (for newer businesses)
- Details of existing borrowing and security
Having accurate, up-to-date accounting records makes the application process faster and improves your chances of approval. Lenders gain confidence when they can see clear financial data rather than guesswork.