How to finance working capital

Working capital finance can help release money tied up in invoices and other assets to help keep your business on the growth path. Funding Options CEO Conrad Ford explains

Working capital is the amount of cash a business has instant access to at any given time — liquid cash that isn’t tied up in assets. The common way to calculate it is assets minus liabilities, which gives you the amount that you have left over once all future obligations are taken into account.

For example, with £10,000 of capital in the bank and £7,000 owed to suppliers, your working capital is actually £3,000.

Working capital finance is designed to boost available working capital, to equip your business with the funds it needs to pursue a new opportunity or strategy.

Working capital vs cashflow

Working capital is often confused with cashflow, and while this point is arguable, they refer to different things in practice. Working capital is the amount of liquid, useable cash available — whereas cashflow is simply the timing of when the money enters and leaves your bank account.

To reuse the example above, if you had £10,000 in the bank, a bill due for £7,000, but wanted to pay £5,000 up-front for another project, this cashflow problem would mean you were short of at least £2,000 of working capital (I say ‘at least’ because leaving your bank account at zero is certainly not a strategy I would favour in my own business!). To make up this shortfall, working capital finance could help.

While the fundamental role of working capital is quite simple, there are many different ways to get it.

Working capital loans

A business loan is often a straightforward solution to solving a working capital gap. They might be secured against assets you own, or unsecured if your business profile is strong enough, and are useful for boosting working capital in the short or medium term. A business loan can normally be used for any purpose too — so there’s potential to kill two birds with one stone and pay for growth projects and immediate obligations at the same time.


Business overdrafts have historically been the backbone of small business finance, but sadly the big banks have largely withdrawn them in recent years. However, the alternative finance industry has started filling that gap, with a range of overdrafts and revolving credit facilities available.

These forms of short-term funding can be great for unexpected costs or seasonal lulls — but with relatively low credit limits it might not be the best solution for more ambitious plans.

Invoice finance

If you offer credit terms to your customers, you could use invoice finance to speed up the payment cycle and get on with the next job. There are a few different kinds of invoice finance, offered by both mainstream banks and small specialists alike, as well as online auction and peer-to-peer services.

Similar to overdrafts though, invoice finance might not provide a big enough lump sum for a bigger project since the amount you can borrow is limited by the value in your sales ledger. Having said that, they’re another good way to ‘unlock’ working capital in the short term.

Trade finance and supply chain finance

Trade finance and supply chain finance are like more complex forms of invoice finance, designed for companies that rely on suppliers or end buyers, and can facilitate large import or export transactions with companies overseas. These types of facilities are often agreed on a project basis, but can equip you with the working capital you need to scale up.

Merchant cash advances

Like invoice finance but designed for retail businesses that use card terminals, merchant cash advances are agreed based on recent revenue and repaid as a percentage of card takings — making them another flexible option for smoothing out cashflow bumps and giving you a chunk of working capital to use.

There are many more ways to finance working capital besides these examples — but whichever method you choose, working capital finance can be a great way to give your business a boost.

Conrad Ford is chief executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. 

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Conrad Ford

Conrad Ford is the managing director of Funding Options, an award-winning team of business finance experts who specialise in helping businesses get the loans they need. Ford is a chartered management...

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