Working capital finance and loans: UK guide to funding cash flow

Published and reviewed 25 October 2026. General information, not advice. Figures are illustrations, not lender quotes.

The short version

Working capital finance is short-term funding for the gap between paying for stock, staff and suppliers and being paid by customers. The main options are an overdraft, a revolving credit facility, a short-term or flexible loan, invoice finance, stock or trade finance and, for card-taking businesses, a merchant cash advance.
Size the gap before you borrow. Debtor days plus stock days, minus the days you take to pay suppliers, gives your cash cycle. In our example, a distributor with £2.4 million of sales had about £411,000 tied up, and growing sales by 25% would tie up about £103,000 more, almost three times the extra profit it would make in the year.
Match the finance to the shape of the gap. A recurring or seasonal gap suits a facility you draw and repay, such as an overdraft, revolving credit or invoice finance. A one-off cost suits a short fixed loan. A fixed loan for a seasonal gap means paying interest on money you do not need for half the year.
In October 2026, with Bank Rate at 3.75%, the same £50,000 for 90 days cost about £1,420 through invoice finance, £1,705 through a bank overdraft, £3,750 from an online credit line at 2.5% a month and £7,500 as a merchant cash advance, an equivalent annual rate of about 11.5% to over 100%.
Overdrafts can be withdrawn on demand and most facilities come with a debenture, a personal guarantee or both. Finance smooths the timing of cash. It cannot fix a business that loses money, so check the cheap and free levers, such as faster collection and better supplier terms, first.

What working capital is, and what working capital finance does

Working capital is the money a business has tied up in running its day-to-day trade. On a balance sheet it is current assets, such as cash, stock and money owed by customers, minus current liabilities, such as money owed to suppliers, HMRC and short-term lenders. A business can be profitable and still run short of cash, because profit is counted when a sale is made, and cash arrives only when the customer pays.

Working capital finance is any funding used to cover that timing gap rather than to buy a long-term asset. It goes by several names. Lenders and brokers talk about working capital loans, cash flow finance, short-term business finance and trade finance. The products differ, but each one does the same job: it puts cash in the business now and is repaid as customers pay, stock is sold or a busy season brings money in.

Typical uses include:

paying suppliers and wages while customers take 30, 60 or 90 days to pay;
buying stock ahead of a busy season, such as Christmas for a retailer or spring for a garden supplier;
taking on a large new contract that needs materials and staff before the first invoice is paid;
covering a VAT, PAYE or corporation tax bill that falls in a quiet month;
riding out a late payment from a large customer.

What it should not normally fund is long-term investment. Premises, vehicles and machinery usually suit a commercial mortgage, asset finance or a longer term loan, repaid over the years the asset earns its keep. Paying for a van out of an overdraft leaves less room for the job the overdraft is there to do. Our upcoming introduction service is limited to UK limited companies, so this guide assumes the borrower is a limited company, though most of the principles apply to any business.

How big is your gap? Working out your cash cycle

Before you compare any finance, work out how much cash your trade actually ties up and why. The simplest measure is the cash conversion cycle: the number of days between paying for what you sell and being paid for it.

Cash cycle = debtor days + stock days − creditor days

Debtor days: how long customers take to pay, on average. Trade debtors divided by annual sales, multiplied by 365.
Stock days: how long stock sits before it is sold. Stock divided by annual cost of sales, multiplied by 365. A service business may have little or no stock but plenty of work in progress, which acts the same way.
Creditor days: how long you take to pay suppliers. Trade creditors divided by annual cost of sales, multiplied by 365.

Worked example: a £2.4 million distributor

A limited company distributes catering supplies to restaurants and cafés. These are assumptions for the illustration, with VAT left out for simplicity: sales of £2.4 million a year, cost of sales of £1.8 million, customers paying in 55 days on average, stock held for 40 days and suppliers paid in 30 days.

Money owed by customers: £2,400,000 × 55 ÷ 365 = about £361,600.
Stock: £1,800,000 × 40 ÷ 365 = about £197,300.
Less money owed to suppliers: £1,800,000 × 30 ÷ 365 = about £147,900.
Working capital tied up in the trade: about £411,000, or about 17% of sales. The cash cycle is 55 + 40 − 30 = 65 days.

That £411,000 has to come from somewhere: the company’s own cash, retained profits or finance. And it moves with the business. If customers slip from 55 to 65 days, another £65,800 is tied up overnight.

The same arithmetic shows where to look first. In this example, three changes would free about £164,400 without borrowing anything:

Cash released by changing each part of the cash cycle in the worked example
Change	Calculation	Cash released
Customers pay in 45 days, not 55	£2,400,000 × 10 ÷ 365	About £65,800
Suppliers paid in 45 days, not 30	£1,800,000 × 15 ÷ 365	About £74,000
Stock held for 35 days, not 40	£1,800,000 × 5 ÷ 365	About £24,700
All three together	Working capital falls from about £411,000 to about £246,600	About £164,400

None of these is easy, and pushing suppliers too hard has its own cost. But a lender will ask the same questions, and a business that can show it has worked on its cash cycle is a better borrower. If most of your gap comes from customers paying slowly, invoice finance is built for exactly that problem.

Why growth eats cash: the overtrading trap

Fast growth is one of the most common reasons profitable businesses run out of cash. Every extra pound of sales needs extra stock and extra money owed by customers before it produces any cash. If the business funds that from its current account, the account can empty just as the order book looks its best. Accountants call this overtrading.

Worked example: growing the distributor by 25%

Take the same distributor. It wins new customers and expects sales to rise by a quarter, from £2.4 million to £3 million, with the same payment terms and stock levels. It makes a net profit of about 6% of sales.

Working capital at 17% of sales rises from about £411,000 to about £513,700, so the trade needs about £102,700 more cash.
The extra £600,000 of sales brings about £36,000 of extra profit in the year, before tax.
The growth needs almost three times as much cash as it generates in its first year. Without finance or a change in terms, the company has to slow down, stretch its suppliers or run short.

This is the situation working capital finance is best at. Facilities linked to the trade itself, such as invoice finance and asset-based lending, grow as sales grow, because the money owed by customers is the security. A fixed loan sized for last year’s turnover can be outgrown within months. If you are planning growth, build the extra working capital into the plan and talk to a lender before the cash runs low, not after.

The main types of working capital finance

There are more products than most businesses realise, and some are better known by the lender’s brand name than by what they are. This table sets out the main options for UK companies. The next section covers what each one costs.

The main types of working capital finance compared
Option	How it works	Typical size	Best for
Business overdraft	A limit on your business current account. You pay interest only on what you use. Usually reviewed each year and repayable on demand.	A few thousand pounds up to a modest share of turnover	Small, short and unpredictable gaps
Revolving credit facility (RCF)	A committed limit you draw and repay as needed, usually for one to five years, with set terms the lender cannot change on a whim. Common for larger companies.	Often from about £250,000	Established companies with recurring needs
Flexible credit line	An online lender’s revolving facility, drawn through an app, with interest charged monthly on the balance. Terms vary, so check whether the lender can reduce the limit.	About £1,000 to £1 million	Quick access for younger or smaller companies
Short-term business loan	A fixed sum repaid in instalments over about 3 to 24 months.	About £5,000 to £500,000 unsecured	A one-off cost with a clear payback
Invoice finance	Draw 70% to 90% of unpaid business invoices, repaid as customers pay. Factoring includes credit control; discounting is usually confidential.	Grows with your sales ledger	Business-to-business trade with slow payers
Asset-based lending	A combined facility against debtors, stock, equipment and sometimes property, usually from a bank or specialist.	Usually from about £1 million	Larger companies with substantial assets
Stock and trade finance	The lender pays your supplier, often overseas, and you repay when the goods are sold or after an agreed period.	Linked to each purchase	Importers and businesses buying large stock orders
Merchant cash advance	An advance repaid as a percentage of future card takings, priced with a fixed fee called a factor rate.	Around one to one and a half times monthly card sales	Card-taking businesses such as shops, cafés and salons
VAT and tax loans	A short loan, often 3 to 12 months, to spread a VAT, corporation tax or PAYE bill.	Up to the size of the bill	A tax bill that falls in a quiet month
Asset refinance	Release cash from equipment or vehicles you own, then pay it back over a set term.	Linked to the value of the assets	Asset-rich businesses needing a cash injection

Sizes are indicative ranges drawn from published lender criteria and the other guides on this site. Individual lenders set their own limits, and the British Business Bank publishes an independent overview of the same options.

Overdraft or revolving credit facility?

Both let you draw and repay, but the commitment is different. An overdraft is usually reviewed each year and, under most bank terms, can be reduced or withdrawn at any time. A revolving credit facility is committed for its term: as long as you keep to the agreement, including its covenants, the lender has to make the money available. That certainty has a price. RCFs usually carry an arrangement fee, a commitment fee on the unused part of the limit, and financial covenants that you must report against. Some also require the balance to be cleared down to zero for a short period each year, to show the facility is funding a cycle rather than a permanent hole.

Working capital loans

“Working capital loan” is a marketing label more than a product. It usually means a short unsecured term loan or a flexible credit line, sold for cash flow rather than investment. Compare it like any other loan: on the amount you receive, the repayments, every fee and the total repayable in pounds. Our guide to unsecured business loans covers how these loans are priced and what lenders require.

Matching the finance to the shape of the gap

The most useful question is not which product is cheapest, but which one matches the way your cash need rises and falls. A mismatch costs money even when the headline rate looks good.

Which kind of working capital finance suits which cash flow problem
Your situation	Usually suits	Why
Customers take 30 to 90 days to pay, all year round	Invoice finance	The facility rises and falls with your sales ledger and is repaid as customers pay.
A busy season needs stock or staff in advance	Overdraft, RCF or flexible credit line	You draw for the months you need it and pay nothing on an unused limit, or a small fee.
A large new contract needs materials up front	Invoice finance, trade finance or a short-term loan	Ideally finance that grows with the contract. A fixed loan works if the payback is clear.
A one-off cost with a clear payback, such as a tax bill	Short-term loan or VAT loan, or HMRC Time to Pay	A fixed sum repaid over a few months is simple to plan and to price.
Regular card takings, few other assets	Merchant cash advance or flexible credit line	Repayments flex with sales. Expensive, so compare carefully.
Importing stock with a long lead time	Trade or stock finance	The lender pays the supplier and you repay after the goods are sold.
Persistent losses or a permanently maxed overdraft	Not more short-term debt	The problem is profitability or structure. See the warning signs below.

Worked example: a seasonal business, overdraft or fixed loan?

A company supplying garden centres buys stock from January for spring. Its forecast shows a cash gap that builds to a peak and then clears. These are assumptions for the illustration: the balance it needs to borrow at each month end is £30,000 in February, £75,000 in March, £110,000 in April, £90,000 in May, £50,000 in June, £15,000 in July and nothing for the rest of the year. Over 12 months that averages about £30,800.

Overdraft: a £120,000 limit, to leave some headroom, at Bank Rate plus 4%, so 7.75% a year, with a 1.5% arrangement fee. Interest on the balances above is about £2,390 and the fee is £1,800, so about £4,190 for the year.
Flexible credit line: no fee, but 2% a month on the balance drawn. About £7,400 for the year.
A 12-month fixed loan of £110,000 at 9% with a 2% fee: about £5,440 of interest and a £2,200 fee, so about £7,640. Worse, repayments of about £9,620 a month start straight away, while the gap is still growing, so the company would need to borrow more to cover them, and from August it would be paying interest on cash it does not need.

The overdraft wins here because the cost follows the balance. The comparison would change if the bank would only offer a much smaller limit, or if the business needed the certainty of a committed facility. These figures are illustrations, not quotes.

What working capital finance costs in October 2026

Working capital products are priced in very different ways: an annual rate over Bank Rate, a monthly rate, a fee per invoice, or a fixed factor rate. That makes them hard to compare until you turn each one into pounds for the same amount and the same period. The ranges below are indicative for UK limited companies in October 2026, with Bank Rate at 3.75%.

Typical costs of working capital finance in the UK, October 2026
Option	How it is priced	Typical cost	Fees to look for
Bank overdraft	Variable annual rate, often quoted as an EAR	About 10% to 16% EAR on smaller limits; secured larger limits often Bank Rate plus 3% to 6%	Arrangement and annual renewal fees, often 1% to 2% of the limit
Revolving credit facility	Margin over Bank Rate or SONIA on the drawn balance	Commonly about 2.5% to 5% over the benchmark for mid-sized companies	Arrangement fee, commitment fee on unused limit, legal costs
Flexible credit line	Monthly rate on the balance	About 1.5% to 4% a month, an APR of roughly 20% to 60%	Some charge a fee on longer terms or each drawdown
Short-term unsecured loan	Fixed rate or monthly rate	About 8% to 15% APR from banks, 15% to 40% from online lenders	Arrangement fees, early repayment terms
Invoice finance	Service fee on invoices plus a discount charge on money drawn	Discount charge commonly 2% to 4% over Bank Rate; service fee 0.5% to 3% of turnover funded	Minimum fees, audit fees, exit fees and notice periods
Merchant cash advance	Fixed factor rate on the advance	Factor rates of about 1.1 to 1.5, which can equal an APR of 40% to well over 100%	Usually none on top, but no saving for repaying early

Overdraft rates are published by banks on their own pages, such as NatWest’s business overdraft page, and change with Bank Rate. Ranges for loans and invoice finance match the other guides on this site, including our guide to business loan interest rates.

Worked example: the same £50,000 for 90 days

A company needs £50,000 for about 90 days to cover a gap while a large customer pays. These are assumptions for the illustration, not quotes.

Invoice discounting: 85% advance against £58,800 of invoices, a 1% service fee on those invoices (£588) and a discount charge of 3% over Bank Rate, so 6.75% a year, on £50,000 for 90 days (£832). Total about £1,420.
Bank overdraft: 7.75% a year on £50,000 for 90 days (£955) plus a 1.5% arrangement fee on a £50,000 limit (£750). Total about £1,705.
Flexible credit line: 2.5% a month for three months. Total about £3,750.
Merchant cash advance: a factor rate of 1.15, so £57,500 repaid from 12% of card takings of about £100,000 a month, clearing in about 145 days. Total cost £7,500.

As an annual rate on the money used, that is about 11.5% for invoice finance, 13.8% for the overdraft, 30% for the credit line and about 106% for the merchant cash advance, because the advance is being repaid from the first day and the fee is charged on the whole amount. The overdraft fee would look smaller if the limit were used again later in the year, and the invoice finance figure assumes no minimum fee. Always ask for the total cost in pounds over the period you actually expect to borrow.

Two other costs are easy to miss. First, a supplier’s early payment discount is a form of finance too. Turning down 2% for paying in 10 days rather than 30 is equivalent to borrowing at about 37% a year, so if you can borrow for less, taking the discount pays. Second, some facilities charge whether you use them or not, through commitment fees, minimum monthly fees on invoice finance or annual renewal fees on an overdraft.

How much can you borrow for working capital?

Each type of working capital finance has its own ceiling. Asset-linked facilities lend against something the lender can collect or sell, so the limit comes from that asset. Unsecured facilities lend against the business itself, so the limit comes from turnover, cash flow and credit history.

Invoice finance: commonly 70% to 90% of eligible unpaid invoices. Invoices more than about 90 days old, disputed invoices, overseas debts and anything over the limit for a single customer usually count for nothing, so the cash available can be well below the headline rate. Our guide to how invoice finance works shows how availability is calculated.
Stock: where a lender will lend against stock at all, usually as part of asset-based lending, it is often a much lower share of value than for invoices, because stock is harder to sell in a hurry.
Overdrafts: usually a modest share of turnover, set by the bank from your account history, profits and any security.
Unsecured loans and credit lines: often linked to monthly turnover, with first-year limits lower for younger companies. Online lenders commonly start at six to twelve months of trading.
Merchant cash advances: often around one to one and a half times average monthly card takings.

Every facility also has to pass an affordability test. Lenders look at whether the business’s cash flow can service the new debt on top of everything it already pays, and they count existing loans, hire purchase and sometimes a share of any overdraft limit. Our guide on how much you can borrow explains those tests with worked examples.

Government-backed working capital

The Growth Guarantee Scheme gives accredited lenders a 70% government guarantee on facilities of up to £2 million per business group, and it covers overdrafts, invoice finance and asset finance as well as term loans. It can help a lender agree a facility where security is limited. The business remains liable for the whole debt, lenders can still ask for personal guarantees, and a director’s main home cannot be taken as security under the scheme. Ask each lender whether it offers the scheme for the product you need.

What lenders look at, and what to prepare

Working capital lenders care most about the next few months. They want to see that cash comes in reliably, that the facility will be repaid from that cash, and that the business is not using short-term money to plug losses.

What working capital lenders usually ask for and why
Document	What the lender is looking for
Business bank statements for 3 to 12 months	Regular income, healthy balances, how close you run to any limit, and bounced or returned payments.
Aged debtor and creditor lists	Who owes you money and for how long, who you owe, and whether any customer dominates the ledger.
A cash flow forecast for 12 months	When the gap peaks, how big it gets and how the facility will be repaid. Show your assumptions.
Latest filed accounts and recent management accounts	Profitability, net assets and the trend since the year end.
Details of existing finance	Every loan, overdraft, lease, hire purchase agreement and director loan, with monthly payments.
HMRC position	Whether VAT, PAYE and corporation tax are up to date, and any Time to Pay arrangement, which you should mention up front.
Stock and contract details	For stock or trade finance, what you hold or buy, from whom and how quickly it sells. For contract finance, the contract itself.

A clear forecast does more for a working capital application than almost anything else, because it answers the lender’s main question: how will this be repaid? Build it month by month, show the peak, and show the facility being cleared or reduced as the cash comes in. Our guide on how to get a business loan covers credit checks, open banking and why applications are declined.

Security, guarantees and the small print

Short-term facilities often look simple, but the terms behind them can reach well beyond the amount borrowed. Read these points in any offer.

Repayable on demand. Most overdrafts can be reduced or withdrawn by the bank at any time, even if you have done nothing wrong. Do not fund a permanent need with a facility that can disappear. A committed facility, such as an RCF or a term loan, gives more certainty.
Debentures. Banks and invoice finance providers commonly take a debenture, a fixed and floating charge over the company’s assets, registered at Companies House. It can rank ahead of later lenders and make other borrowing harder to arrange. Ask whether a debenture is required and what it covers.
Personal guarantees. Directors of smaller companies are usually asked to guarantee working capital facilities. A guarantee can make you personally liable for the shortfall if the company cannot pay. Ask for a cap and agree when it will be released. Our guide to personal guarantees explains what you are signing.
Covenants and clean-downs. RCFs and larger facilities often require you to meet financial ratios and report regularly. Breaching a covenant can allow the lender to raise the price or call in the facility.
Minimum terms and exit fees. Invoice finance agreements often run for 12 to 24 months with a notice period of three months or more. Leaving early can cost more than the facility saved.
Regulation. Lending to a limited company for business purposes generally sits outside FCA consumer credit protection, so you have fewer rights than with personal borrowing. Many banks follow the Lending Standards Board’s Standards of Lending Practice for business customers, and smaller businesses may be able to take a complaint to the Financial Ombudsman Service.

Funding VAT and corporation tax bills

Tax bills are one of the most common reasons businesses look for short-term finance, because they arrive as large, fixed sums on dates that do not always suit the business. VAT returns and payments are usually due one calendar month and seven days after the end of each VAT period. For most companies, corporation tax is due nine months and one day after the end of the accounting period, and larger companies pay in instalments.

You have three main options when a bill is hard to meet:

Plan for it. Set aside VAT and an estimate of corporation tax in a separate account as you go. It sounds obvious, but it is the cheapest working capital there is.
Ask HMRC for time. If you cannot pay in full, contact HMRC before the deadline. Businesses can often agree a Time to Pay arrangement to spread the bill, usually with interest charged on the late amount. HMRC expects you to explain why you cannot pay and how you will keep up with future bills.
Borrow it. A VAT or tax loan spreads the bill over a few months. Compare the cost with HMRC’s interest, and remember that HMRC arrears and broken arrangements are a warning sign for other lenders.

If tax bills regularly cause a crisis, the problem is usually a cash flow forecast that leaves them out, rather than a lack of finance.

Cheaper ways to free up working capital first

Borrowing should rarely be the first answer to a working capital squeeze. These measures cost little or nothing, and any lender will be more comfortable if you have tried them.

Invoice promptly and accurately. Every day between finishing the work and sending the invoice adds a day to your cash cycle. Disputes over errors add far more.
Agree and enforce payment terms. Put terms in writing before the work starts, chase on the due date and stop supplying persistent late payers where you can.
Use your statutory rights. If a business customer pays late and your contract does not set a different rate, you can claim interest at 8% above Bank Rate and fixed debt recovery costs. Simply making it known that you will claim can change behaviour.
Talk to suppliers. Longer terms from a supplier are interest-free finance. A supplier who trusts you may agree 45 or 60 days rather than 30, especially in return for a regular order.
Cut slow stock. Clearing lines that do not sell releases cash and storage costs.
Take deposits or stage payments on large orders and long projects, so the customer funds part of the work.

Late payment rules are also changing. The Commercial Payments Bill, introduced in the House of Lords in May 2026, would cap payment terms at 60 days for larger businesses paying smaller suppliers and make statutory interest on late payment mandatory for larger payers, with new powers for the Small Business Commissioner. Its Lords third reading was scheduled for 20 October 2026 before it moves to the House of Commons. It is not yet law, the measures could change, and most are not expected to take effect before 2027.

How to arrange working capital finance, step by step

Build a 12-month cash flow forecast. Month by month, including VAT, tax, loan repayments and seasonal swings. Find the peak gap and how long it lasts.
Work out your cash cycle. Debtor days, stock days and creditor days. Decide whether the gap is permanent, seasonal, growth-driven or one-off.
Try the free levers. Collection, supplier terms and stock. Recalculate the gap.
Choose the shape of facility. Revolving for a recurring or seasonal need, invoice-linked for slow payers, fixed for a one-off cost.
Size it with headroom. Ask for a limit above your forecast peak, so a late payment does not push you over.
Gather the documents. Bank statements, accounts, management figures, aged debtors and creditors, the forecast and details of existing finance.
Compare offers in pounds. For the amount and period you actually expect to use, including every fee, minimum charge and exit cost. Check whether the facility can be withdrawn on demand.
Read the security and guarantees. Know what the debenture covers and what you are guaranteeing personally. Take legal advice if the sums are significant.
Review it every year. As the business changes, the right facility may change too. A business that has outgrown its overdraft may be ready for invoice finance or an RCF.

When more borrowing is the wrong answer

Working capital finance changes when cash arrives. It does not change how much cash the business makes. If the business is losing money, borrowing to cover the gap only delays the problem and adds interest. Be wary if you see these signs:

The overdraft is always at its limit and never swings back into credit. That suggests a permanent shortfall, which usually needs a longer-term loan, fresh equity or a change in the business, not a bigger overdraft.
You are using new finance to make payments on old finance. Stacking merchant cash advances or short-term loans can drain cash quickly, because each one takes its cut from the same takings.
HMRC arrears are building up. Unpaid VAT and PAYE are a common sign of a business under strain, and directors can face personal consequences if a company keeps trading when it cannot pay its debts.
Margins are falling. If costs have risen faster than prices, more finance funds the losses. Look at pricing and costs first.

If the company may be insolvent, take advice from an accountant or a licensed insolvency practitioner early, before taking on new debt or giving new personal guarantees. Free debt advice for businesses is also available from charities such as Business Debtline.

Where Business Loan Advice fits

We are not a lender and we do not give personal advice. We are preparing a service that will introduce UK limited companies directly to lenders, including for working capital and invoice finance. No lenders are confirmed yet, so we cannot currently obtain quotes or make introductions. You will not pay us a fee. If a lender pays us commission after the service launches, we will tell you before asking your permission to refer you. The service will not cover individuals, sole traders or partnerships.

In the meantime, the business loan calculator, the invoice finance calculator and these guides are free to use with no sign-up. Our guide to commercial loans compares every main type of business borrowing. If your limited company needs working capital, you can register its interest and we will contact you about the service launch. Read how we are paid for the details.

Common questions

What is working capital finance?

Short-term funding that covers the gap between paying for stock, staff and suppliers and being paid by customers. The main types are overdrafts, revolving credit facilities, short-term or flexible loans, invoice finance, stock and trade finance, and merchant cash advances. It is repaid from the cash the trade brings in, rather than over the life of a long-term asset.

What is a working capital loan?

Usually a short unsecured term loan or a flexible credit line marketed for cash flow rather than investment, typically over 3 to 24 months. Compare it like any other loan, on the amount received, the repayments, every fee and the total repayable in pounds.

How do I work out how much working capital I need?

Add your debtor days and stock days, then subtract your creditor days to get your cash cycle. Multiply the debtor days by daily sales and the stock and creditor days by daily cost of sales to put pounds on it. A 12-month cash flow forecast then shows when the gap peaks and how long it lasts.

What is the cheapest way to fund working capital?

The cheapest money is your own: faster collection, longer supplier terms and less slow stock. After that, invoice finance and secured bank overdrafts are usually the cheapest borrowing, at around 7% to 16% a year in October 2026. Online credit lines and merchant cash advances cost much more once converted to an annual rate.

Is an overdraft or a loan better for working capital?

For a gap that comes and goes, an overdraft or other revolving facility is usually better, because you pay interest only on what you use. For a one-off cost with a clear payback, a short fixed loan is simpler and cannot be withdrawn on demand. In our seasonal example, an overdraft cost about £4,190 against about £7,640 for a fixed loan.

What is a revolving credit facility?

A committed limit that a company can draw, repay and redraw over an agreed term, often one to five years. Unlike most overdrafts, it cannot be withdrawn on demand while you keep to its terms. It usually carries an arrangement fee, a commitment fee on the unused limit and financial covenants.

Can a new business get working capital finance?

It is harder. Many online lenders want six to twelve months of trading, and banks often want filed accounts. Invoice finance can be available sooner to a business with creditworthy business customers, because the customers’ invoices are the main security. Our guide to startup business loans covers the options for very young companies.

Do I need security for working capital finance?

Not always. Short-term loans and credit lines can be unsecured, though directors are usually asked for personal guarantees. Banks and invoice finance providers commonly take a debenture over the company’s assets. Ask exactly what security and guarantees each offer requires before you compare prices.

How quickly can working capital finance be arranged?

Online credit lines and short-term loans can be decided within a day or two once documents are uploaded. A new overdraft can take days to weeks. Invoice finance usually takes one to three weeks to set up because the provider checks your sales ledger, and revolving credit facilities and asset-based lending can take several weeks.

Does the Growth Guarantee Scheme cover working capital?

Yes. The scheme covers overdrafts, invoice finance and asset finance as well as term loans, up to £2 million per business group through accredited lenders, with a 70% guarantee to the lender. The business is still liable for the whole debt, and lenders decide whether to use the scheme.

Can I use finance to pay a VAT or corporation tax bill?

Yes. Some lenders offer short VAT and tax loans that spread the bill over a few months. Before borrowing, ask HMRC whether a Time to Pay arrangement is possible, and compare the cost. Contact HMRC before the deadline if you cannot pay in full.

What is overtrading?

Growing faster than your working capital can support. Each extra sale needs extra stock and money owed by customers before it produces cash, so a fast-growing business can run short of cash while profitable. In our example, 25% growth needed about £102,700 of extra working capital but brought only about £36,000 of extra profit in the year.

Is a merchant cash advance a good way to fund working capital?

It can suit a card-taking business that needs money quickly and values repayments that fall in quiet weeks. But it is expensive: in our example a factor rate of 1.15 on £50,000 repaid over about 145 days was equivalent to an annual rate of about 106%. Compare the total repayable in pounds with other options first.

Is working capital finance regulated?

Lending to a limited company for business purposes generally sits outside FCA consumer credit regulation, so you have fewer protections than with personal borrowing. Read the facility letter, any debenture and any personal guarantee carefully. Many banks follow the Lending Standards Board’s Standards of Lending Practice for business customers.

Sources, checked 25 October 2026

Bank of England: Bank Rate, 3.75% after the 17 September 2026 decision

British Business Bank: working capital finance options

GOV.UK: Growth Guarantee Scheme, eligibility and facility limits

NatWest: business overdrafts, published rates and fees

GOV.UK: VAT return and payment deadlines

GOV.UK: pay your Corporation Tax bill

GOV.UK: if you cannot pay your tax bill on time, Time to Pay

GOV.UK: late commercial payments, charging interest

UK Parliament: Commercial Payments Bill [HL]

Office of the Small Business Commissioner: what the Late Payments Bill could mean for your business

UK Finance: invoice finance and asset-based lending