Fund the gap between doing the work
and getting paid for it.
A good order comes in. The wages, materials, fuel and subcontractors needed to deliver it leave the bank account long before the customer pays. That distance is the working capital gap, and it is the most common reason a perfectly healthy business runs short of cash.
Get a Same-Day Assessment Call 020 3617 2021What working capital finance actually means
Working capital is the money a business needs to keep operating from day to day: stock, wages, suppliers, fuel, rent. Working capital finance is any funding used to cover that requirement, rather than to buy something the business will own for years.
It is worth being clear that it is not a product. It is a category, and it covers several quite different things, some of which fit the problem considerably better than others. The cost of choosing the wrong one is not only the rate you pay. It is what the wrong product leaves behind once the immediate pressure has passed.
Why the gap opens
- Growth widens it. More work means more going out in advance, and the money returns later and in larger amounts.
- Work bunches. Orders that paused for a month reappear close together, while the costs attached to them are immediate.
- Terms are set by the customer. A business with a few large customers rarely has much say in when it gets paid.
- Late payment sits on top. UK SMEs are owed around £70.4bn in unpaid invoices at any one time.
- Seasonality puts the costs and the receipts in the wrong order.
This is a timing problem
Rarely because trade is weak. Usually for the opposite reason.
A business can be profitable, well run and holding a full order book, and still find that the money it has genuinely earned is sitting in somebody else's payment run. Nothing about that reflects on how the business is managed. It reflects on when its customers choose to pay.
The usual ways of funding it
These are the options most businesses are offered. They are not equivalent, and the differences are worth understanding before deciding.
| Option | What you are really funding |
|---|---|
| Overdraft | Day to day shortfalls. Flexible and generally inexpensive, but usually repayable on demand, and considerably harder to obtain than it once was. |
| Business loan | A fixed sum repaid out of future earnings. Well suited to buying something lasting. Less suited to a gap caused by timing. We have written an honest comparison of the two. |
| Revolving credit facility | A limit you draw down and repay repeatedly. Useful, though it is still borrowing against work you have not yet done. |
| Merchant cash advance | A share of future card takings. Built for retail and hospitality, not for businesses that invoice their customers on terms. |
| Selective invoice finance | Money you have already earned, against work already delivered and invoiced. It clears itself when your customer pays. |
The mismatch that causes most of the damage is using a loan to bridge a timing gap. A loan does not close the gap, it moves it. The money arrives, the pressure lifts, and then the repayments begin while the payment terms that caused the problem carry on exactly as before. That pattern has a name, and we have written about where it ends.
How selective invoice finance works
Many business owners have never heard of selective invoice finance, which is the honest reason it does not come up more often. Around 58% of SMEs have never looked beyond their main bank when they needed funding, so the option never enters the conversation.
What it involves
- You choose which invoices to fund. One, or several. No obligation to commit your whole sales ledger.
- Draw up to 80% of an approved invoice's value, with funds released immediately once the invoice is approved.
- Facilities from £25,000 to £250,000.
- Approval rests mainly on your customer's creditworthiness rather than your own.
- No long-term contract, and nothing to pay when you are not using it.
- It is self-liquidating. When the invoice is paid, the facility clears. It is not a loan.
Where it is the wrong answer
- If you sell to consumers rather than to other businesses, there are no commercial invoices to fund.
- If your sales are made up of a great many small invoices, the administration tends to outweigh the benefit.
- If the customer behind the invoice is in poor financial health, approval becomes difficult.
- If your contract prohibits the assignment of invoices, it may not be possible at all. Some do.
- If the shortfall is structural rather than a matter of timing, no form of finance will fix it, and we will tell you so rather than fund it.
Ready to talk?
There is a reasonable case for each of the options above, depending on what the money is actually for. The difficulty most business owners face is not a shortage of offers. It is that the offers arrive quickly, arrive from people paid to place them, and rarely come with anybody asking what the money is genuinely needed for. We would rather have that conversation properly. If selective invoice finance is not the right fit, we will say so, and it costs nothing to find out either way.
Same-day assessment, no obligation
Tell us your payment terms and we will tell you what could be released.