Cash-flow gaps are not a sign that a company is failing. They are usually a sign that it is growing, or that its customers pay slowly, or that its costs and its income arrive on different dates. A profitable company can still run out of cash in a given week, and the tool for that is working capital finance.
The trap is treating working capital finance as one thing. It is not a product, it is a shortlist. Overdrafts, revolving credit facilities, invoice finance, merchant cash advances, trade finance and short-term loans all sit under the same umbrella, and they cost wildly different amounts for the same gap. Pick the wrong one and you can pay several times over the odds. This guide maps your company's cash cycle to the facility that actually fits, and shows on a worked example where the cheap answer and the expensive answer diverge.
Company borrowers only. The finance introductions on this page are for UK limited companies and limited liability partnerships borrowing for business purposes. We introduce your company to a panel of commercial-finance brokers; we are not a lender and do not give regulated credit advice. If you are a sole trader, an individual, or borrowing for personal or household purposes, this service is not for you and you should speak to an FCA-authorised consumer-credit firm.
What Working Capital Finance Actually Is
Working capital is the money your company needs to keep the lights on between paying for something and being paid for it. In accounting terms it is current assets (stock, unpaid customer invoices, cash) minus current liabilities (suppliers, wages, tax due). When that figure is tight or negative at the moment a bill lands, you have a working-capital gap.
Working capital finance is any short-term facility that funds that gap. It is deliberately a broad term because the right solution depends entirely on what is causing the shortfall. A company whose cash is locked in a slow debtor book has a very different problem from one facing a one-off quarterly tax bill, even if both feel identical on the day the account runs dry. The skill is not finding finance, it is matching the facility to the cause.
This is a company-facing product. Under Article 36A of the Regulated Activities Order, introducing a body corporate to a lender for business borrowing is outside the consumer-credit perimeter, which is why every option below is framed for a limited company. Sole-trader and personal borrowing is a different regulated market and is fenced off throughout.
The Working Capital Cycle: Where the Gap Comes From
Every trading company runs a cash cycle. You pay suppliers and staff to build or buy stock, the stock sells and becomes a debtor (an unpaid invoice), and eventually the customer pays and the cash returns to fund the next round. The length of that loop is your cash-conversion cycle, and it is measured in days.
- Stock days. How long inventory or work-in-progress sits before it is sold. Longer for a manufacturer or wholesaler, near zero for a service firm.
- Debtor days. How long customers take to pay after being invoiced. On 30 to 60 day B2B terms this is where most gaps live.
- Creditor days. How long you take to pay your own suppliers, which offsets the gap. The more credit your suppliers give you, the smaller your funding need.
The formula is simple: stock days plus debtor days minus creditor days equals the number of days your company must self-fund. A firm holding stock for 20 days, paid by customers at 50 days, but given 30 days by its own suppliers, is funding a 40-day gap out of its own pocket. Multiply that by daily outgoings and you have the size of the facility you need. Understanding this is the difference between borrowing a sensible amount and borrowing blind.
The Product Map: Five Ways to Fund the Gap
Once you know the size and the cause of the gap, the shortlist narrows fast. Here is the map from cause to product.
Invoice finance
If the cash is tied up in unpaid B2B invoices, invoice finance releases it. The lender advances 80% to 90% of an invoice's value within a day of you raising it, and the balance (less fees) when the customer pays. It scales automatically with your sales, so you are financing a real asset rather than piling on fixed debt. It is the natural fit for companies with a genuine trade-debtor book. It does not fit card-led or cash-led businesses, which have no ledger to lend against. Our full invoice finance guide walks through factoring versus discounting.
Revolving credit facility
If the gap is lumpy or seasonal rather than tied to invoices, a revolving credit facility gives you a committed limit to draw and repay at will, paying interest only on the balance in use. It behaves like a modern overdraft, without the on-demand fragility that has made bank overdrafts harder to secure. Ideal when you cannot predict exactly which weeks will be tight.
Merchant cash advance
If the company is card-led (retail, hospitality, ecommerce), a merchant cash advance repays as a fixed percentage of daily card takings, so repayments flex down in quiet weeks. Fast and flexible, but priced on a factor rate, which usually makes it the most expensive option per pound borrowed. Best kept for genuinely card-heavy businesses, not used as a default. Note that a company MCA is unregulated; a sole-trader MCA can be regulated consumer credit and is not something we introduce.
Short-term loan
If the gap is a defined one-off cost with no matching debtor (a supplier prepayment, an equipment repair, a tax bill), a fixed short-term loan of 3 to 18 months gives certainty: a set sum, a set repayment, a set end date. Simple, but you pay interest on the whole amount for the whole term, so it is a poor match for a gap that comes and goes.
Trade finance and VAT loans
If the gap is a stock purchase or an import, trade or stock finance funds the goods directly. And if the gap is specifically a quarterly tax bill, a VAT loan spreads it over several months. Both are targeted tools for a specific cause rather than general-purpose funding.
How to Choose by the Cause of the Gap
The fastest way to shortlist is to name the cause honestly. The table below maps common causes to the facility that usually wins.
| What is causing the gap | Best-fit product | Why |
|---|---|---|
| Customers on 30 to 60 day B2B terms | Invoice finance | Releases cash locked in the ledger; scales with sales |
| Seasonal or unpredictable swings | Revolving credit facility | Draw and repay flexibly; interest only on drawn balance |
| Card-led business, quiet weeks | Merchant cash advance | Repayment flexes with card takings (but pricey) |
| One-off defined cost, no debtor | Short-term loan | Certainty of a fixed sum and term |
| Buying or importing stock | Trade or stock finance | Funds the goods directly ahead of the sale |
| A quarterly VAT or corporation tax bill | VAT loan or short-term loan | Spreads a lumpy tax payment across months |
Two rules cut through most of the confusion. First, finance an asset before you add debt: if there is an unpaid invoice or stock behind the gap, fund that directly rather than taking a general loan against it. Second, match the shape of the facility to the shape of the gap. A recurring, variable gap wants a flexible line; a one-off, fixed gap wants a fixed loan. Get those two right and cost usually follows.
Seasonal Versus Structural Gaps
Before you finance anything, work out whether your gap is seasonal or structural, because the answer changes the honest advice.
A seasonal gap repeats predictably and closes on its own. A garden-supplies company that is stretched every spring and cash-rich by autumn has a seasonal gap. Flexible, revolving finance is ideal because you use it only in the tight months and pay nothing extra the rest of the year.
A structural gap does not close by itself. If your company is permanently short because margins are thin, terms are too generous, or overheads outrun income, borrowing more only postpones the problem and adds interest to it. The fix there is operational (tighter credit control, renegotiated supplier terms, a pricing review) before it is financial. A good broker will fund a genuine seasonal or growth gap; a good accountant will help you tell the two apart. If your gap keeps widening rather than closing, that is a structuring conversation, not a borrowing one.
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Worked Example: A 45-Day Gap on £100k Monthly Turnover
Take a limited company turning over £100,000 a month, selling to trade customers who pay at 45 days. It needs roughly £50,000 of funding to bridge a typical month while it waits to be paid. Here is what that same gap costs under three different facilities, held for one 45-day cycle. Figures are illustrative to show the spread, not quotes.
| Facility | How it prices | Indicative cost for £50k over 45 days | Notes |
|---|---|---|---|
| Revolving credit facility | ~9% p.a. on drawn balance + arrangement/non-utilisation fees | ~£555 interest for the period | Cheapest if you only draw when needed; unused limit sits ready |
| Invoice finance | ~1.5% service fee + ~3% over base discount margin on advances | ~£1,000 to £1,300 all-in | Also outsources credit control; scales with your ledger |
| Merchant cash advance | Factor rate ~1.25 on the advance | ~£12,500 total cost | Only relevant if card-led; far more expensive per pound |
The point is the spread. For an identical £50,000 gap, the flexible revolving line costs a few hundred pounds, invoice finance costs around a thousand and also takes over your credit control, and a merchant cash advance costs many times more. The MCA is not badly designed, it is simply built for a card-led business with no debtor book, where the others do not apply. Choosing on cause, not on whichever lender replies first, is worth thousands here.
One tax footnote: interest and finance fees on borrowing for company trading purposes are generally an allowable deduction against corporation tax, which lowers the true net cost. The rate at which that relief bites depends on your profit band, and the marginal band between £50,000 and £250,000 has a 26.5% effective rate. We do not re-explain that here; see corporation tax and marginal relief for the mechanics, and confirm deductibility with your accountant.
What a Facility Costs, and What Drives the Price
Every working capital product prices differently, which is why comparing a headline rate across products is meaningless. Watch these components:
- Interest or margin on the money you actually use, quoted as a percentage over a base rate for loans and revolving facilities, or as a discount margin for invoice finance.
- Service and arrangement fees. Invoice finance carries a service fee for running the ledger; loans and lines carry arrangement fees; revolving facilities often add a non-utilisation fee on the undrawn portion.
- Factor rate on a merchant cash advance, which is a multiplier, not an annualised rate. A 1.25 factor on £40,000 means £50,000 repayable regardless of how fast you repay, so the effective annual cost is high.
- Personal guarantees. Not a cash cost, but a real one. Unsecured facilities usually ask a director for a personal guarantee; invoice finance, secured on the ledger, is often lighter.
Always compare the total amount repayable over the life of the facility, not the advertised rate. Two facilities with similar headline rates can differ sharply once fees and structure are counted.
Eligibility and How to Apply
Working capital facilities are for trading limited companies and LLPs. Lenders assess trading history (many want 12 months or more, though invoice finance can suit younger companies with a solid debtor book), turnover, profitability, the quality of your customers, and director creditworthiness. Facilities on the panel typically start around £25,000 and scale from there.
To move quickly, have ready: your latest filed accounts and up-to-date management accounts, a recent aged-debtor report if you are considering invoice finance, bank statements, and a clear one-line use of funds. The company-gate applies at the first question: if the borrower is not a limited company or LLP borrowing for business purposes, this is not the right service and we route you to the accountant instead of the finance panel.
From there the process is short. You tell us the cause and size of the gap, we introduce your company to the commercial-finance broker panel, and they return facilities to compare. Because we are introducing a body corporate, this sits outside credit broking under Article 36A of the Regulated Activities Order; we are an introducer, not a lender or an adviser. For the wider debt picture, see the business loans guide, which sits above this page and covers secured, unsecured and government-backed options in full.
Sources and Further Reading
For independent, non-commercial guidance on company funding, see the British Business Bank finance hub, the government's business finance and support pages, and UK Finance for invoice finance and asset-based lending standards and data. The regulatory perimeter that makes company introductions unregulated is set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (Article 36A on credit broking and Article 60C on business-purpose exempt agreements), with the FCA's interpretation in its PERG 17 credit-broking guidance. On the tax treatment of finance costs, HMRC's Business Income Manual BIM45301 covers the deductibility of interest and finance charges.