What is a working capital loan?

Is your business facing cash flow problems or does it need cash to expand? If so then a working capital loan can be great option. It allows your business to access money quickly without committing to a long-term loan. It’s typically used for immediate costs like buying stock, or paying suppliers and wages.

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What is working capital?

Working capital is the money your business uses for its day-to-day operations. It’s calculated by adding together your business’s liquid assets (cash balance, stock and outstanding invoices) and subtracting its short-term liabilities (invoices due to suppliers, payroll and other monthly bills).

It’s a good idea to keep track of your business’s working capital. It gives a snapshot of your business’s financial health and indicates how much cash you can afford to safely spend. It also helps you predict cash flow problems in the future so you can take action quickly.

Even large and successful businesses can sometimes have issues with their working capital. They may face significant seasonal fluctuations in sales or need short-term borrowing to finance a rapid expansion.

What is a working capital loan?

A working capital loan is a short-term business loan to finance day-to-day operations. The lender pays your business an upfront sum to help pay wages, suppliers or to fund unexpected business expenses. This loan is usually repaid in under 12 months, depending on the terms of your agreement.

A working capital loan is an umbrella term that includes short-term business loans, business lines of credit and merchant cash advances. However some lenders use the term “working capital loan” to refer solely to business lines of credit.

There are various types of working capital loan, some secured on assets and some unsecured. They are usually available over a short-term period like 3-12 months. Some working capital loans are extremely flexible and allow businesses to borrow and repay cash with no penalties up to a pre-agreed limit.

How does a working capital loan work?

Working capital loans work in different ways according to the type of loan and the terms of your agreement with the lender. They include traditional short-term business loans and more flexible business lines of credit.

Once you have been approved for a working capital loan, your agreement will include the following information:

  • The total amount of your loan or credit limit.
  • Repayment terms including if they are flexible. Some types of loan allow your business to repay a proportion of sales and include no repayment penalties for early repayment.
  • When repayments are due. If your business has agreed flexible payment terms you may still have a minimum monthly payment.
  • The interest rate payable on your loan and how it is calculated.
  • The length or term of your agreement. Most working capital loans are for less than 12 months.

What can I use a working capital loan for?

Working capital loans can be used to help your business with any short-term cash requirements. They are particularly useful to help with the following:

  • Rapid business expansion requiring cash for new stock and payroll. A loan can be used to fund new stock and wages and then repaid once sales start coming in.
  • Long delays between buying stock, paying wages and receiving cash from customers.
  • Large seasonal fluctuations in sales. A loan can be used to help with wage costs during the quiet periods and then be repaid during the busy periods.
  • Unexpected bills or expenses.
  • Long customer payment terms or late paying customers.
  • Smaller capital purchases.

Working capital loans are generally not suitable for:

  • Covering losses - there is a significant risk that your business will be unable to repay the loans.
  • Long-term borrowing - they are usually arranged over a short period like 12 months.
  • Buying long-term expensive assets – it often makes sense to match the loan term to the useful life of the asset to spread the cost.

Types of working capital loan

What is a short-term loan?

A short-term loan of 3-12 months might be a good option if you want a simple, fixed-term loan for your business. It works just like traditional long-term business loan. Your business borrows an agreed amount from a lender and repays it in instalments over the period of the loan. It is less flexible than a business line of credit as you will need to keep to the agreed repayment schedule.

Interest rates on short-term business loans are generally higher than those for a longer term loan, but lower than those for a business line of credit.

What is a business line of credit?

A business line of credit (sometimes just called a working capital loan) works a bit like a bank overdraft. The lender agrees an upper loan limit and your business can borrow and repay amounts up to this amount. You don’t have to borrow the full loan amount and you can repay your loan early with no penalties.

For example, you may agree a £50,000 credit limit with the lender. This credit limit is valid for 12 months, or however long your agreement states. Your business can borrow up to £50,000 at any time and repay it with no penalties. Just like an overdraft, you will be charged interest for the loan based on how much you have outstanding at any time.

What is a merchant cash advance?

A merchant cash advance is a type of short term loan available to businesses that use a card terminal for customer payments. Borrowing is repaid through customers’ card payments. Repayments are processed automatically as the lender works directly with the card terminal provider.

A merchant cash advance is generally quick to arrange and doesn’t require detailed credit checks. It is also very flexible as repayments vary according to the amount of cash received from your customers.

A merchant cash advance is not be suitable for your business if you only process a limited number of card payments. It can be more expensive than other types of working capital loan. This is because the lenders often charge extra processing fees.

What are the pros and cons of a working capital loan?


  • Quick - many lenders agree to offer finance within 24 hours. It can take a bit longer to receive the cash – sometimes 7-14 days.
  • Unsecured loans available - some lenders offer unsecured working capital loans, but this will depend on your business’s credit rating and size. You may need to give a personal guarantee.
  • Flexible – with some loans, your business can borrow or repay amounts at any time within the agreed credit limit. This is great if you have seasonal fluctuations in your business sales. There is usually no fee for early repayment.
  • Fixed rate – interest is often charged at a fixed rate so you will know what payments to expect.


  • Tight lending criteria – some lenders follow stricter credit scoring criteria than other loans, especially for unsecured lending.
  • Short term – most loans are over a period of 3-12 months and will need to be renewed.
  • Limited borrowing with some loans - secured working capital loans will be restricted by the value of the assets you have available for security.
  • Expensive – often have a higher interest rate than other types of business loan because they are short term and flexible.

How do I apply for a working capital loan?

Working capital loans are available from banks, brokers and specialist lenders. Your business applies for them in a similar way to other business loans.

Lenders will assess your business or personal credit rating. They will also look at how long your business has been trading; what your business will use the loan for and the financial health of your business.

If you own a small business or operate abroad you may have fewer borrowing options. Some lenders will only lend to businesses that are trading in the UK, and are set up as a Ltd company LLP Partnership.

Here are some working capital loan lenders in the UK:

Frequently asked questions

Lenders typically offer working capital loans of between £10,000 - £500,000 depending on their lending criteria and the size of your business.

If you are applying for a merchant cash advance, the amount may be limited by the value of your card transactions. Likewise, secured borrowing is restricted by the value of your available assets.

To assess how much your business needs to borrow, you should work out your available working capital. Also take in account any known expenses and bills that are not yet recorded in your financial accounts.

Lenders will check your business’s or personal credit score before deciding how much to lend. They will also look at your accounts, length of time in business and the reason for a loan.

If you can’t borrow as much as your business needs then you should consider shopping around. Lenders have varied lending criteria and will offer different loan amounts.

Interest rates vary depending on the financial health of your business, the size of the loan and your credit rating. Lenders also often charge upfront fees to arrange the working capital loan.

Business lines of credit are usually more expensive than a traditional short term loans because they are so flexible.

A working capital loan is classed as a current liability on your balance sheet just like any other type of short-term lending. In general, any loan repayments due in under 12 months should be treated as current liabilities.

Paypal offers working capital loans to businesses that use their services regularly. This type of loan works a bit like a merchant cash advance. Your business applies to borrow cash from Paypal who then assess your business’s eligibility based on their criteria and your level of Paypal transactions.

Repayments are automatically taken from your PayPal account when you have sales, based on the repayment percentage in your agreement. If you only have a low volume of Paypal sales then your business will still need to make the minimum payment every 90 days.

Your business can clear the Paypal loan earlier than the end of the agreement with no penalties.

If you want to improve your business’s cash flow but don’t want a working capital loan, then here are a few other alternatives:

  • Improve your credit control – look into automating your invoice chasing process and consider if you can reduce your payment terms with your customers.
  • Invoice financing – this is a type of business loan that’s secured against unpaid invoices due from your customers.
  • Asset financing – this allows you to rent or gradually buy equipment for your business.
  • Equity finance – find other investors to inject cash into your business without charging interest. The downside is that you might need to give up some control in your business.