Working capital loans: funding the day-to-day

A working capital loan is borrowing that pays for the day-to-day costs of running a business, rather than for a long-term asset. The British Business Bank says it is often taken out over the short or medium term and can provide an injection of funding for various day-to-day needs.

Working capital itself is the funds a business uses in day-to-day trading, and the British Business Bank notes it is an indication of liquidity, showing the business’s ability to meet its current obligations. Our guide on what working capital is shows how to work out the figure.

In practice a working capital loan is usually an ordinary term loan with a particular purpose: you receive a lump sum and repay it on an agreed schedule. The label describes why you borrow, not a separate legal product.

A working capital loan pays for the running costs that come before the money arrives, such as payroll and stock. The British Business Bank lists day-to-day expenses like payroll and inventory, and squeezes caused by late customer payments, a sudden rise in utility bills or a sudden opportunity to expand.

• Wages and other payroll costs while a large invoice is outstanding
• Stock or materials ahead of a busy season or a big order
• Supplier bills and overheads during a slow period
• A short-term gap caused by customers paying late

The Growth Guarantee Scheme takes the same line: lenders may provide finance for any legitimate business purpose, including managing cashflow and investment, though the business must be able to afford the additional debt.

A working capital loan works like any term loan: you apply, the lender assesses the business, and if you accept an offer you receive a lump sum and repay it with interest and fees over the agreed term. The British Business Bank describes term debt as a loan with a predetermined repayment schedule, usually with set payments that make budgeting easier.

Because the money is meant to bridge a gap, the repayments need to fit the cash coming in. A fixed monthly repayment is simplest to plan for. Some providers instead take a share of your sales, so repayments follow trade. Ask which structure applies and what the total repayable is before you agree.

A fresh application is needed for each loan, which the British Business Bank says can lengthen the qualification process. Plan ahead, because borrowing when the gap has already opened leaves little room to compare offers.

A working capital loan can be either. The British Business Bank says a secured loan requires collateral, so the amount you can borrow depends on the assets you can offer as security, while with an unsecured loan your credit rating matters more and you will likely have to give a personal guarantee.

Read how personal guarantees work before you sign, and see our guide to unsecured business loans for that route.

How much you can borrow depends on your business, and how long you have to repay depends on the lender and product. The British Business Bank says the size of a working capital loan depends on various aspects of your business, and that secured loans are limited by the assets you can offer.

For reference, term loans under the Growth Guarantee Scheme run from three months up to six years with a minimum of £25,001, while overdrafts under the scheme run from three months up to three years. Capzy’s lender panel covers term loans of £25k–£500k over 3–60 months and revenue finance of up to £1m. Those are product ranges, not offers.

A working capital loan gives you a lump sum on a schedule, while the other options release cash against something you already have or let you borrow as you need it. The British Business Bank lists several, and the right one depends on the cause of the gap.

If customers are the problem, invoice finance may match the gap better. If takings are mostly card payments, look at a merchant cash advance. If the gap comes and goes, a revolving facility can mean you pay for borrowing only when you use it.

A loan is the right tool when the gap is temporary and you can show where repayment will come from. If the cash will arrive from a known sale or customer inside the term, borrowing bridges the wait.

• Build a rolling forecast so the size and length of the gap are on paper. Our guide to a cash flow forecast shows how.
• Check whether faster invoicing, clearer payment terms or tighter stock could close the gap without interest.
• Ask whether the gap will recur. A one-off loan for a repeating problem only delays it.

A cash flow forecast turns a feeling of being short into a figure you can match to a product, and clear payment terms can shrink the gap at source.

The main risk is that the loan outlasts the problem it was meant to solve. Repayments, interest and fees are fixed costs that remain whether or not customers pay on time.

• Total cost: compare the full amount repayable and the APR, and see how APR works in our APR guide.
• Security: a secured loan can put an asset at risk.
• Personal guarantee: you may become personally liable if the business cannot repay.
• Tight repayments: a short term with large instalments can create the next gap.

Our guide to how APR works explains why the rate alone does not show the total cost.

Capzy is a credit broker, not a lender, and is paid by the lender. We introduce businesses to lenders that offer working capital finance and set out what comes back so you can compare it. The lender directory shows which providers specialise in which products.

You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria. We do not give accounting or tax advice, so ask your accountant to check the figures behind a decision to borrow.