Working capital

Definition

Working capital (sometimes called net working capital, NWC) is the difference between a business's current assets and its current liabilities. It measures the liquid resources a business has to fund day-to-day operations.

The formula:

Working capital  =  Current assets  −  Current liabilities

What counts on each side

Current assets are anything the business can convert to cash within 12 months:

• Cash in the business bank account
• Accounts receivable (invoices owed to the business)
• Stock / inventory
• Prepayments (e.g. rent paid in advance)

Current liabilities are what the business owes within 12 months:

• Accounts payable (invoices owed to suppliers)
• Accrued expenses (e.g. PAYE, VAT owed but not yet paid)
• The portion of any loan due within 12 months
• Overdraft balance

Why it matters for lenders

For a UK alt-lender, the working-capital figure tells two things:

1. Can the borrower service the loan? A business with negative working capital is already short of liquid resources — a fresh loan rarely fixes that, and underwriters often decline or escalate.
2. What product fits? A business with positive working capital that is mostly tied up in receivables is an invoice finance target. One with stock-heavy working capital is a stock-finance or working-capital term-loan target. The shape of the asset base drives the right product.

For a Borrowsignal data customer, working-capital intensity is one of the signals we use to score a fresh UK SME's likely borrowing demand. A construction firm in week 4 of trading with a £150k contract pending has a working-capital gap that fits a 50–80% scoring band before any other signal comes in.

Typical UK SME working-capital needs

Rough heuristics for an unsecured working-capital loan, based on the median of UK alt-lender deal data Q1 2026:

• £10k–£50k — sole traders, micro-businesses (fewer than 10 employees, <£500k turnover)
• £50k–£200k — established small businesses (10–49 employees, £500k–£2M turnover)
• £200k–£1M+ — established mid-market SMEs (50+ employees, £2M+ turnover)

See our UK working-capital pricing benchmarks Q2 2026 for current lender pricing by facility size.

Common pitfalls

Over-trading. Fast revenue growth pulls working capital down faster than profit grows — the business runs out of cash before the first big customer pays. The classic founder-killer.

Seasonal mismatch. Hospitality and retail SMEs that earn 60%+ of revenue in Q4 need working-capital buffers from May–October. Lenders see a recurring pattern of new applications in late summer for this reason.

Locked-up stock. A high working-capital number on paper doesn't mean cash on hand if 80% of it is in stock that takes 90 days to sell. Stock-aged-debt analysis matters.

Related

• Invoice finance — the most common form of working-capital lending in the UK
• Factor rate — how revenue-based working-capital advances are priced
• Borrower intent data — how Borrowsignal turns working-capital signals into leads
• UK working-capital pricing benchmarks Q2 2026

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Frequently asked

What is the working capital formula?

Working capital = current assets − current liabilities. Current assets typically include cash, accounts receivable and stock. Current liabilities include accounts payable, accrued expenses, the short-term portion of any loans, and overdraft balances. A positive number means the business can cover its near-term bills from near-term assets; negative working capital signals tight liquidity.

How much working capital does a UK SME typically need?

A common rule of thumb is one to three months of operating expenses available as net working capital. For a £1M-turnover SME with £700k annual operating cost, that translates to £60k–£180k of liquid working capital. Capital intensity varies sharply by sector — construction and hospitality SMEs often need more buffer than software or services.

Why do UK SMEs borrow for working capital?

Three main triggers: a customer pays slower than expected (receivables lengthen), the business takes on a bigger contract (stock + WIP rise), or seasonal demand pushes payroll and stock ahead of revenue. Working-capital loans, invoice finance, and merchant cash advances are the dominant alt-lender products serving this need.

How is a working-capital loan priced?

UK alt-lender pricing for an unsecured £50k working-capital loan runs roughly 11%–24% APR as of Q2 2026, depending on lender risk model, facility size, and borrower track record. See our pricing benchmarks article for the latest spread.