Even profitable businesses hit a wall when invoices stack up and bills are due. Working capital facilities of up to £10m bridge the gap between doing the work and banking the money.
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This is the situation working capital finance exists for, and it is not a sign that anything is wrong. A business that wins a large contract has to buy materials, pay wages and deliver before it can invoice — and then wait out the customer's payment terms. The more work you win, the bigger that gap becomes. Growth consumes cash before it produces any.
The gap is measurable. Take the days between paying your suppliers and being paid by your customers, multiply by your average daily cost of sales, and that is roughly the cash permanently tied up in trading. It does not come back while you keep trading at that level; it grows when you grow. Funding it out of retained profit is possible but slow, which is why the alternative exists.
An overdraft is the simplest and the least reliable — it is usually repayable on demand, and the limit can be reduced at exactly the moment you need it. A revolving credit facility behaves similarly but is normally committed for a term, which is worth paying for.
Invoice finance scales with your sales rather than sitting at a fixed limit, which suits a business whose funding need rises with turnover. Trade finance funds the purchase rather than the receivable, which suits importers and anyone paying suppliers up front. A merchant cash advance repays as a percentage of card takings, which flexes down in a quiet month — genuinely useful for retail and hospitality, and usually expensive.
The wrong facility is not usually a disaster, but it costs more than the right one and it fails at the wrong moment. Matching the facility to the shape of the gap is most of the value in the exercise.
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It is broader, and the distinction matters when things get tight. An overdraft is simple and flexible but usually repayable on demand, which means the limit can be reduced at exactly the moment you need it most. Working capital finance covers a family of facilities: a revolving credit facility behaves like an overdraft but is normally committed for a term; invoice finance advances against unpaid invoices so the facility grows with sales rather than sitting at a fixed limit; trade finance funds the purchase rather than the receivable. Matching the facility to the shape of your cash gap matters considerably more than the headline rate does.
It depends entirely on the product, and this is worth settling before you sign rather than after. An overdraft or revolving credit facility can normally be reduced or repaid without penalty, though an overdraft is usually repayable on demand — convenient until the limit is cut at the moment you need it. Invoice finance is where commitment tends to hide: full facilities often carry a minimum term of twelve months or more, a notice period of one to three months, and a minimum monthly fee whether you draw the funds or not. Selective and single-invoice products avoid all of that at a higher cost per invoice. Ask for the minimum term, the notice period and the exit cost in writing.
Factors typically advance 75% to 95% of invoice value, and factor rates commonly run from 0.5% to 5% of that value. There are usually two charges: a service fee for running the facility, expressed as a percentage of turnover, and a discount charge on the funds advanced, which behaves like interest. Quoted separately they look modest; combined and annualised against the money you actually draw, they are frequently more than a comparable loan. But the rate is not what to read first. Check the advance rate and which invoices qualify — overseas or concentrated debtors are often excluded. Check whether it is recourse or non-recourse, so you know who carries an unpaid invoice. Then check the minimum term, notice period and minimum fee, which decide the cost more often than the percentage does.
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