Bionic's guide to working capital loans

Whatever your business, it is likely that you will need some sort of financial support at some point. That is why understanding business financing is so important for all SME owners.

But different types of business finance suit different types of business, which is where Bionic can help - whether you need a working capital loan, asset financing or a long-term lending solution, we can guide you through the process and find the best possible deal for your business.

What is a working capital loan?

A working capital loan is a type of business financing for SMEs. They tend to be short-term loans lasting up to 12 months and are used to cover day to day spending rather than a major investment.

Business working capital loans are often relatively quick to arrange, which can be useful if your business runs up against unexpected short-term cash flow problems.

What is working capital?

Working capital defines how much cash your business has available to spend safely at any given time. 

In financial terms, it is the value of your current assets minus the cost of your current liabilities. Your current assets are defined by your cash holdings in addition to any assets that can be converted into cash and any invoices that are due for payment within a year. Conversely, liabilities are any debts or tax bills that are due for payment within a year.

Working capital is therefore likely to go up and down over time - which is why working capital loans for SMEs could be useful.

What can working capital loans be used for in the UK?

UK businesses can use working capital loans for a wide variety of purposes. Some lenders will tell you specifically what you can and can’t use working capital loans for, but the most common uses are to pay day to day business expenses such as staff wages or rent on a premises, or to cover seasonal shortfalls in revenue.

They are also often used to pay for stock or equipment. However, for larger purchases, other forms of financing - such as a business loan - may be more appropriate. You also cannot use working capital loans to start a business in the UK.

How do working capital business loans work?

Working capital loans for small businesses are relatively straightforward compared to other types of business financing available to SMEs.

Although it depends on who you approach for funding, certain UK lenders will offer working capital business loans of up to around £500,000 and will tend to ask for some form of security (in other terms an asset owned by the business) to “secure” the loan. They are generally short-term loans, lasting up to a year. Repayments are made in monthly instalments with a fixed interest rate agreed at the outset.

What are the pros and cons of working capital loans?

The main advantage of an SME working capital loan is that they can often be arranged quickly, meaning the money can be in your account within days or even hours. This means you can shore up your finances in next to no time to resolve short-term cash flow problems or take up new business opportunities.

Working capital finance is also very easy to understand. Repayments are over a short time frame and interest rates are set out from the start, so you can plan your finances.

The biggest disadvantage is that working capital loans in the UK can be more expensive than other forms of finance. Secured working capital loans are also restricted by the value of any assets you might have to put up as security. Again, this means that a different approach may be necessary if you want to borrow more money or over the longer term. 

What are the alternatives to working capital loans?

There are a number of alternative finance models available for small businesses in the UK, which you may want to look at something else if a working capital loan is not for you.

For short-term borrowing when cash flow is an issue, invoice financing is an option for many business owners. This type of financing allows you to borrow against the value of unpaid invoices. Similarly, a business overdraft arranged with your bank allows you to manage bumps in the road when cash flow is a problem. One drawback of overdrafts however is that they may have a low credit limit, meaning your business will not have much headroom if you are not bringing in revenue.

Other alternatives to working capital loans include revolving credit facilities, which can be arranged through your bank, and asset refinancing, which lets you borrow against assets that are less easily converted to cash.

How to find a working capital loan with Bionic

Bionic is here to help every business find the right financial product. We will first establish whether a working capital loan is right for you, and then make the process as easy as possible so you can concentrate on growing your business.

Our smart technology and dedicated team of specialists will scour hundreds of deals to get you the lowest price.

We will tell you what documentation is required from you to get the application process underway as quickly and smoothly as possible. Enter your postcode to get started.