Working capital is the lifeblood of any business, representing the funds necessary to cover day-to-day operational expenses.
For any UK business, maintaining a healthy level of working capital is essential for sustaining growth, handling unexpected expenses and navigating periods of reduced revenue. However, for many small and medium-sized enterprises (SMEs), maintaining adequate working capital can often be very challenging.
If your business needs a boost of working capital, there are a range of financial solutions available to you. From traditional bank loans and overdrafts to invoice financing and peer-to-peer lending, there are several types of working capital loans. Each of these has its own benefits. In this article, we’ll look at some of the most popular options and help you identify which is best for your business.
1. Term Loans
Term loans are one of the most traditional and widely available financing options for businesses. They involve borrowing a specific sum of money from a bank or alternative loan provider, which is then paid back over a pre-agreed period. These loans come with fixed or variable interest rates, and repayments are usually made in regular instalments, such as monthly or quarterly.
The structured nature of term loans offers clarity and predictability to a business. You’ll know exactly how much you need to repay and when, meaning you can manage your cash flow more effectively.
Term loans are particularly useful for businesses that require a large sum of money to cover significant, long-term working capital needs. However, securing a term loan usually involves a thorough assessment of your business’s creditworthiness. The wait to get approval and secure funding can therefore often be lengthy and stressful.
2. Overdrafts
Overdraft facilities offered by banks provide businesses with a flexible solution for short-term financing needs. An overdraft allows your business to withdraw more money from a current account than you have available, up to an agreed limit. As a result, they’re ideal for managing day-to-day cash flow and covering unexpected expenses.
The main benefit of an overdraft is its flexibility. Unlike term loans, overdrafts can be accessed as needed, meaning you can use and repay funds on a revolving basis. In addition, interest is only paid on the amount you borrow.
However, overdrafts usually come with higher interest rates compared to traditional loans, and these rates are often variable. Banks may also charge arrangement fees, annual renewal fees, and penalties for exceeding your overdraft limit for prolonged periods. Despite these costs, overdrafts are valuable for SMEs, particularly those that experience irregular cash flows.
3. Invoice Financing
Invoice financing is when businesses sell their outstanding invoices to a lender or factoring company to receive immediate cash. This provides working capital without waiting for customer payments. The two main types of invoice financing are factoring and discounting.
Invoice Factoring – A financing company buys your invoices and takes over collection. They provide a percentage of the invoice value upfront and the remainder, minus fees, is accessed once the invoice is paid.
Invoice Discounting – In contrast to invoice factoring, your business retains control of the sales ledger and collections. The financing company advances a portion of the invoice value, and your business repays this advance once the invoice is paid.
Both options are particularly beneficial for small and medium-sized enterprises that face cash flow challenges. Where they differ is in who manages the customer’s payment and handles the collection.
4. Peer-to-Peer (P2P) Lending
P2P lending platforms connect businesses directly with individual investors, meaning you can bypass traditional banks. These platforms help businesses secure loans by matching borrowers with investors willing to fund your needs.
This type of lending is especially useful if your business struggles to obtain traditional loans due to strict credit requirements or lack of collateral. It’s a more flexible and often quicker way of securing funding.
Interest rates on P2P loans can be competitive and vary based on your business’s creditworthiness and which platform you use. Platforms may also require you to pay a fee to apply, cover administrative costs and access particular services.
Successful P2P lending relies on maintaining good relationships with investors. Effective communication and timely repayments can build trust and potentially lead to easier future funding.
5. Business Credit Cards
Business credit cards offer a flexible solution for managing working capital. They give quick access to funds for everyday expenses and short-term needs.
As well as being convenient for making purchases and paying bills, many cards offer cashback, travel points and other rewards that can benefit your business. However, it’s important to note that they usually come with high interest rates and charges can accumulate quickly if balances are not paid in full each month.
Business credit cards offer a convenient and flexible way to manage short-term working capital needs. But it’s essential to use them responsibly to avoid high interest costs and maintain your financial health.
6. Asset-Based Lending
Asset-based lending is a financing option where your business uses its assets as collateral to secure a loan. By offering inventory, equipment, property or financial assets, you can often secure the working capital you need in a short space of time.
The loan you receive will be based on the value of your assets, even if you have limited credit history or face difficulty obtaining traditional loans. In addition, since assets secure the loan, interest rates can often be lower compared to unsecured loans.
Terms and conditions of asset-based lending vary among lenders. Your business should review terms carefully, including interest rates, repayment schedules and conditions for default. However, these loans provide practical financing solutions for businesses with substantial physical or financial assets.
Get a working capital loan today
Your business is unique in its needs, circumstances and goals. If you’re searching for a working capital loan, Funding Triangle can help you.
We supply small businesses with loans ranging from £10,000 to £500,000 with interest rates starting at 4.8%. With no security or assets required, you can apply today and get a decision within as little as one hour.
