Working Capital Finance
‘Working Capital Loans’ or ‘Cashflow Finance’ is designed to boost the working capital of a business to help it grow. Working Capital essentially represents the cash in the bank or soon to be in the bank, that a business does not need to pay for day to day running.
Companies may seek Working Capital Finance for a number of reasons such as specific growth plans or projects, taking on larger contracts or penetrating into new markets. The purpose of a Working Capital Loan is to free up the businesses cash flow, so this new business strategy causes less financial stress on a business and puts less risk on its current operations.
Working Capital Finance is generally expected to be recouped in the short to medium term, with the average loan being between 2 to 7 years. As well as standard working capital loans, there are other products which can complement these loans and increase the companies borrowing, for less risk.
How much money can my company borrow?
Working Capital Loans are designed to help businesses go after new opportunities with current clients, new clients or new markets. The size of loan businesses can access is dependant on the businesses profile and credit history. Our brokers can work with any limited company and you’re your company access anything from £50,000 to £100,000,000.
A major factor which will determine how much money your company can borrow is whether you choose a Secured or Unsecured Loan.
Secured Loans are loans where the business can put an asset or assets, as a guarantee that the loan will be paid back. With these loans there is no maximum, however lending cannot exceed the value of the asset or assets. Meaning if the company owns a £1m property with no mortgage, a company can receive no more than £1m if they use the property as collateral.
An important thing to note is that if there is a mortgage against the property, you can only potentially borrow up to the amount of equity available in the property. Saying this however there are other types of finance available that you could potentially access such as second commercial mortgages against the property.
Unsecured Loans are also available, generally up to the value of £250,000. However even though the loan may not be guaranteed against assets of the business, it will still need to be guaranteed against the directors of the business as a ‘personal guarantee’. With these loans your Credit Rating is incredibly important. Click here if you want to check your personal or business credit ratings.
There are loans available for people with no personal assets or have a bad credit rating. Get in touch today by filling out our form and allow us to match your company’s situation with the best funding available on the market.
Other types of Working Capital Finance:
There are lots of different products in the market that fall under Working Capital Finance, as well as traditional loans. Here is a brief list and explanation of the different types. Please remember that every industry and business is different, with different products available for different needs. For the best advice, please get in touch and one of our brokers will match you with the best lender for your situation.
Overdrafts have traditionally been a useful source of working capital finance for many businesses across all sectors. One of the main issues in business banking, however, is accessing an Overdraft Facility large enough to execute a growth plan or to take on a larger contract. For overdrafts to be approved banks often require a business to turn over a certain amount of money first and be profitable for a number of years, with a long trading history.
Because of this shortfall in the market, the alternative lending market for large amount short term lending has increased – offering lots of different products that can help businesses in the current climate.
Revolving credit facilities
A number of lenders now offer what is called a ‘Revolving Credit Facilities’. This is essentially a pre-approved loan, that can be dipped into whenever the company needs it. The best thing about a revolving credit facility is that after approval a company often only needs to pay interest or fees when the credit facility is used. This gives companies a safety net if they need it, with relatively low risk. If your company’s growth strategy goes pear-shaped, there will be security in place with a revolving credit facility.
Revolving credit facilities are also very useful if your company needs lots of short-term finance arrangements - usually to buy stock or fund a contract that will be paid out and completed in the short term. If you want to take on more clients but can’t afford the upfront costs of onboarding the client – a revolving credit facility is potentially a great way for your business to fill the gap.
Other advantages of revolving credit facilities are that some providers don’t even need your company to hold a specific bank account with a provider, meaning you can have the freedom to direct the money wherever the business needs it to go.
Invoice Financing is incredibly common amongst most SMEs and small businesses today. Essentially Invoice Financing is borrowing money against invoices that are due to your business, this is known as your ‘Creditor Book’. Lenders will lend you a percentage of one invoice or your entire creditor book. It is a handy form of short-term working capital for businesses that need cash faster than their customers will pay for it.
Invoice Financing works well across lots of different industries and different size businesses. However, there are other similar products available such as Factoring - which includes credit control and is often chosen preferably amongst smaller companies with lower value invoices and discounting or selective invoice finance – which is more suitable for larger companies who have larger, more creditworthy customers.
The one problem with any type of invoice financing is the amount you can borrow. You are always restrained by the amount you invoice your customers. This means if your goal is to use Working Capital Finance to install a growth strategy, you will not be able to access a large enough sum of money to do this. Invoice Finance is not really suitable to finance longer-term growth plans.
Trade finance and supply chain finance
Trade finance and supply chain finance are very similar to invoice financing. They’re types of working capital financing that are designed for businesses that focus on the physical stock rather than service businesses.
Supply Chain Finance allows a company to get paid immediately for a sale by a lender, rather than the customer. The lender will shoulder the burden of the invoice until the customer has paid. This works well in situations where the customer delays payment for some reason or the business needs payment sooner to pay for the goods. This type of finance is heavily dependent on the creditworthiness of the customer/buyer, as the lender is taking the risk on the customer paying, rather than your business.
Trade Finance involves companies who are buying from overseas companies. It is essentially finance that can pay for a prepayment for the shipment of goods from overseas before they will be manufactured. A good example is a company that sells ladders from the UK that are manufactured in China. The company will have to pay 50% of the total bill upfront to the manufacturer in China before the ladders are even manufactured. Trade Finance is a loan that will cover this cost and can be paid back once the ladders are sold, sometimes 12 months later.
Both of these types of finance are generally short term and are used in conjunction with other forms of working capital finance.
Merchant cash advances
If your company accepts payments from customers via card terminals, another effective way to increase working capital is through a merchant cash advance. The product gets its name simply because it is a cash advance from your merchant services provider — meaning businesses like retailers, pubs, restaurants, gift shops, and even gyms are all appropriate.
The amount you are able to have advanced is usually expressed as a percentage of your average monthly card revenue (e.g. 150 percent of an average month), and critically, repayments are also taken as a percentage of future card revenue. That means reimbursements may feel relatively painless as they are taken at the source, but it does mean you will have less cash flow.
Asset Finance or Asset Refinancing
If a part of your business growth strategy is to buy assets, then Asset Finance may be a great way to release some of the Working Capital you need to move your business forward. Alternatively, if you are looking for working capital and the company owns assets outright, then refinancing your assets might also be a great way to release some working capital.
If you are seeking funding via an Unsecured Loan the amount you can raise may be limited. However, you can use the assets of your business or the assets you want to buy in the business as collateral against a loan.
By borrowing against assets, company directors won’t often be asked to give a personal guarantee or put their house against the loan, as the amount you can borrow will not exceed the value of the asset. If payments were not to be remade, the lender will simply take the asset back and look at recouping a smaller amount from the company to suffice the debt.
There are lots of specialist types of Asset Finance, that suit some industries better than others. Some of these include:
- Truck Asset Finance
- Limo Asset Finance
- Car Asset Finance
- Taxi Asset Finance
- Machinery Asset Finance
- Fixtures and Fittings Asset Finance
- And lots more…
The best way to figure out the right finance for you is to get in touch and our brokers can match you with the right lender for your business.
Tax Bill and VAT Loans
Businesses have lots of unforeseen costs that can put a businesses future in limbo. The one person you should never owe money to is the taxman. It is very common for businesses to realise that they haven’t saved enough for corporation tax, VAT or PAYE at the end of the month or quarter. These bills can lead in fines, a strike against a company’s credit rating and interest owing – which can really stifle a companies growth.
VAT loans, PAYE loans and Corporation Tax Loans are short term loans, around 3-12 months in duration. They are useful to increase cash flow, especially if used in conjunction with asset finance to release the VAT that you will recoup in the next quarter from the purchase of your asset.
Again, these loans are handy but are simply a tool that can be used with other working capital products and a working capital loan – to release the funds you need to move your business further.
There is no one solution for how to finance a company through growth. Every company is different and often companies will use a mixture of these working capital financing products to achieve their desired goals. The easiest way forward is to get in touch and let us help you work out the best solutions for your business, to unlock the finance that your business needs to grow.