The Different Types of Working Capital Finance

Having access to sufficient working capital when you need it is one of the key ingredients to business success. There are a multitude of different finance solutions, each with different requirements in terms of availability of funds and importantly, the security which is required.

Here’s a short overview of the options available:

Business Loans

The more traditional form of Working Capital Finance. Business Loans provide a lump sum of funds, usually for a specific purpose, such as business acquisition, strategic growth, or acquisition of property. Usually repaid over a fixed term with interest. Business Loans are predominantly secured by either property security or a charge over the business Balance Sheet.

Business Loans are usually blended with other forms of finance, such as Equipment Finance for the acquisition of equipment and Trade Finance or Invoice Finance for stock purchases and to meet fluctuations in cashflow.

Overdrafts/Lines of Credit

Similar to Business Loans, Overdrafts and Lines of Credit provide businesses with additional working capital. Whilst Overdrafts can sometimes be linked to property security, they are typically provided through lending against the tangible net worth of the business Balance Sheet (Tangible Net Worth = Total Assets – Intangible Assets – Total Liabilities).

The financier will provide the business with a set limit, the business then draws funds up to the limit as required. Interest is charged on the daily balance. The facilities can be structured either as an ongoing line of credit or can be structured to have ongoing limit reductions, similar to a principal and interest loan.

Trade Finance

Trade Finance provides businesses with additional working capital to pay suppliers for raw materials and other cost of goods sold. Trade Finance Limits are typically assessed against the tangible net worth of the business Balance Sheet. Property security is usually not required.

Trade Finance allows businesses to immediately pay their domestic and international suppliers for goods and materials. The business then pays back the financier across a number of months, usually up to 4 months.

Trade Finance can be a great facility for managing project cash flow variations. It can also improve key supplier relationships. Suppliers may offer a discount for agreeing to shorter payment terms which can help offset the interest from the Trade facility.

Invoice/Debtor Finance

Invoice/Debtor Finance is a facility that provides an advance on the accounts receivable balances (debtors) from unpaid customer invoices. The facilities are secured by the debtors’ balances and usually don’t require additional property security.

The financier will approve a set facility limit. Customer invoices are uploaded to the financier portal which will then make a portion of that value available, typically 80% of the invoice value. The business then pays back the financier as customer invoices are paid.

Invoice/Debtor Finance is great for businesses that want immediate access to their customer invoices without wanting to provide additional security.

Insurance Bonds and Performance Bonds

Performance Bonds can be used as an alternative to providing Bank Guarantees to customers and landlords. Where traditional Bank Guarantees usually require cash or property as security, Bonds are advanced against the tangible net worth of the Balance Sheet.

For customers working in the construction and infrastructure industries, Bonds can provide a significant benefit.

Key Points

When deciding on the best Working Capital Finance options, the key considerations are; available limits, the security required by the financier and the flexibility required.

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