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Understanding working capital finance

Looking to grow your business? Or just need a little extra working capital to keep your business moving? 

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Unlike a traditional loan, Capify’s is paid back in very small amounts regularly. The repayments are completely automated so you don’t need to do anything. Many business owners love our regular payments, because they don’t have to save a large amount by a fixed date each month.

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The benefits of a Capify business loan

It is important to understand what working capital finance is and why it is a necessary part of the day-to-day operations of your company. The success of your business depends on many things like profitability, a growing customer base, and customer satisfaction but also on the available capital.


– Working Capital financing

– short term working capital finance

– long term working capital

– Working Capital lenders

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What is working capital finance and who provides it?

Working capital financing is business finance designed to boost the working capital available to a business. It’s a popular choice for business growth or investment projects.

This type of finance is to free up cash for growing the business which will be recouped in the short- to medium-term. Working capital finance can generally be obtained by applying directly to banks or by using various brokers and lending firms.

Working capital finance can be achieved with many types of lending. Some methods are especially created to support working capital in your industry, while others are useful for specific sectors or requirements.

Working capital lenders

Lenders are often specialists in working capital financing, offering flexible or fixed lending products to small businesses with a specific goal in mind. Having liquid cash available to you is essential for current purchases and future growth. The more flexible the working capital lender, the better.

Long-term working capital

Businesses can spread out their investments and repayments with long-term working capital. Instead of borrowing over a short period, long-term working capital is often repaid over several months, if not years. This is helpful for keeping repayments affordable over a longer period.

Short-term working capital

Some business owners prefer to keep their working capital financing short-term, meaning they’ll pay it off in a few weeks or months. This works best for small businesses that want to fund something fast, and don’t want to keep making repayments for a long period. Your business could buy what it needs to succeed, and have it all paid for within the same financial quarter.

Before you agree to short-term working capital from working capital lenders, make sure the repayment terms are achievable for your business. Short-term agreements should still be affordable along with your other commitments and bills.

Here are some of the more common types of working capital finance:

Trade Credit

If you sell or import products, trade finance could give you the cash you need to pay your suppliers. There are various trade finance solutions you can choose, but what they have in common is they help you close the pay gap at the beginning of your sales cycle, so you can fulfil customer orders without having to wait for the money to clear in your account for weeks at a time.

Trade credit is a great opportunity for growing businesses, once terms are agreed with their suppliers. This type of credit puts less pressure on cash flow, and reduces and manages the capital requirements of a business.

Bank Overdraft

Overdrafts have always been a good way of raising working capital loans for many businesses in all industries, though they can be difficult to obtain with a traditional business bank. If you consider alternative lenders to banks, you will find lots of flexible business overdrafts, which can be very helpful in obtaining finance working capital at short notice when you need it.

The problem with overdrafts is that, generally, they carry a low credit limit, which can limit your options. These overdrafts are unsecured loans, so the limit is likely to be typically low unless your business has a strong credit history.

Working Capital Loan

Working capital loans are normally over a short or medium term, designed to boost cash in the business to achieve growth. The size of the loan you can get depends on many areas of your business profile.

These loans are not suitable to buy long-term investments or assets and are, instead, used to provide a short-term injection of working capital for all your business’ financial commitments. 

These commitments can include such costs as payroll, rent and debt payments. Working capital loans are basically a type of corporate debt borrowing used by a company to finance its daily operations and cash flow needs.

Purchase of Bills/Discount of Bills

Invoice discounting, discounting of bills or purchasing of bills are all the same source of working capital financing for the seller of goods on credit. It is an arrangement whereby a seller recovers money due to the financial intermediaries before it is due.

Basically, it can be defined as the sale of a bill to an invoice discounting company before the due date of payment, normally at a value which is less than the original invoice amount. The difference between the bill amount and the amount paid is the fee payable to the bill purchasing company. How large the fee is will depend on the time outstanding before payment due date, the monetary amount, and the associated perceived risk.

Bank Guarantee

A bank guarantee can help your business negotiate favourably with buyers and suppliers by protecting them from non-performance under a contract whilst assisting with your financing needs. Banks can provide support with performance, advance payment, tender, warranty, financial guarantees and letters of credit.

With a bank guarantee arrangement, the bank promises to pay a certain amount of money to the beneficiary in case there is a default by the applicant. It basically compensates the seller if the buyer fails to make payment for the product or service. There is a fee involved for undertaking such guarantee which the bank charges to the seller.

Letter of Credit

A letter of credit is an official document issued by a bank or financial company to a business that provides goods or services, stating that they will pay for the goods or services the seller provides to a buyer. The bank or finance company will then chase reimbursement from the buyer or from the buyer’s bank. A letter of credit is a guarantee to the seller that it will be paid by the issuer, regardless of whether the buyer pays or not. With a letter of credit, there’s no risk that the buyer will fail.


Factoring, also known as storing or debtor financing, is when a financial company buys either a debt or an invoice from another business. Factoring can also be used as a method of invoice discounting in various markets which is a very similar process though in a different context. With this option, invoices are discounted in order to allow the buyer to make a profit on the settlement of the debt. This method transfers the ownership of accounts to another party which then chases up the debt.

Factoring is a good way to relieve your business of a debt for less than the total amount, providing you with working capital to continue trading.  The buyer of the debt, known as the factor, will chase the debt for the entire amount and therefore makes a profit when it is fully repaid. Factoring involves paying additional fees once the debt has been settled. It is a very common method used by exporters of goods to accelerate their cash flow.

Invoice Financing

Invoice finance is a way of borrowing money based on what your customers owe to your business. Unpaid invoices are money owed to your business, however, you must wait up to 90 days to receive payment in some instances. Invoice financing can get you most of the cash owed immediately, so you don’t have to wait to get paid.

The concept is simple, instead of waiting days or weeks for your invoices to be settled by your customers, the specified lenders will advance you most of the value immediately. That means 

you get paid faster for completed work, so you can focus on running your business.

Working Capital Management

Working capital management is the management of short-term liabilities and short-term assets. This method is used to help businesses to run successfully and generate enough cash flow to deal with short-term financial commitments and daily operational expenses.

Working capital management is a crucial area of consideration when selling a mid-market business. The ability to effectively manage working capital means that your business will be able to operate with minimal levels, while still having an adequate amount to run the business.

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