Working capital loan
Short-term borrowing to fund day-to-day operations. The dominant unsecured product UK SMEs take when cashflow stretches further than the bank account can.
Definition
A working capital loan is short-term business borrowing used to fund operating cashflow needs — payroll, stock, rent, VAT — rather than to purchase a specific asset. UK SME working capital loans are typically 3–24 months term, £5k–£500k facility size, unsecured or backed by a personal guarantee from the director.
How it differs from a term loan
"Term loan" is a generic umbrella covering any fixed-amount, fixed-term business loan, including longer-duration asset finance. A working capital loan is a sub-category specifically used for short-term operating cashflow.
| Attribute | Working capital loan | Asset-backed term loan |
|---|---|---|
| Typical duration | 3–24 months | 3–7 years |
| Decisioning speed | Hours to 48 hours | 2–6 weeks |
| Median APR (Q2 2026) | 16% | ~8% |
| Security | Unsecured or personal guarantee | Asset (vehicle, equipment, property) |
| Use of funds | Operating expenses, stock, payroll | Asset purchase or refinance |
| Repayment | Fixed monthly P&I | Fixed monthly P&I |
When a UK SME uses one
Three classic triggers:
- Customer pays slowly. A construction sub-contractor invoices a major builder on 60-day terms; the sub-contractor's payroll runs weekly. The 60-day gap is bridged by a working capital loan or invoice finance.
- Big contract starts. A small caterer wins a 6-month contract worth £150k. They need £40k upfront for stock, staff and kit before invoice 1 is paid. Working capital loan funds the ramp.
- Seasonal pre-spend. A retailer or hospitality SME builds stock or hires staff ahead of Q4. Revenue arrives Nov–Dec; payroll runs all summer. Loan funds the build-up; revenue clears the loan.
Alternatives
- Invoice finance — advances cash against unpaid invoices. Fits if business is B2B with receivables; cheaper per day than a working capital loan, but only addresses the receivable gap.
- Merchant cash advance — advance against future card sales (see factor rate). Fits if business has predictable card revenue (hospitality, retail). Repayment flexes with revenue but APR-equivalent is higher.
- Revolving credit facility — pre-approved line drawn as needed. More expensive per drawn day but more flexible than a term loan.
- Business overdraft — from the high-street bank current account. Usually cheaper but slower to arrange and often capped at lower limits.
How UK alt-lenders price working capital loans
Three pricing models in use:
Amortising APR
Standard term-loan pricing. Borrower repays fixed monthly P&I; APR is calculated on reducing balance. Used by Funding Circle, Lendable, Aldermore, OakNorth.
Interest-only + fee
Monthly interest, balloon at end, plus an origination fee. Used by iwoca, Tide. Effective APR usually equivalent to amortising but feels different in the cashflow.
Factor-rate (flat-cost) model
Total repayment = facility × factor rate (e.g. 1.18). Repaid daily as % of revenue. Used by Liberis, YouLend. See factor rate glossary entry.
Full pricing benchmark: see UK working-capital pricing benchmarks Q2 2026.
Underwriting signals lenders look at
- Working capital position — current assets vs current liabilities
- Trading history — minimum 6–24 months depending on lender
- Director's personal credit + AML/KYC
- Bank statements — 3–12 months of business account activity
- Existing senior debt — registered charges at Companies House
- Sector — SIC code; some sectors blacklisted (gambling, adult, crypto, etc.)
- Personal guarantee availability — affects pricing materially
Common borrower mistakes
Borrowing for the wrong duration. A 12-month working capital loan to fund a 5-year equipment purchase creates refinance risk — at month 11 the borrower is taking another loan to pay this one off, often at worse terms.
Stacking facilities. Taking multiple working capital loans from different lenders simultaneously. Underwriting algorithms detect this via Companies House charges and bank statement patterns; once flagged, future credit is harder.
Personal guarantee without insurance. A director PG on a £100k facility means personal liability if the business fails. PG insurance (typically 5–8% of the PG value annually) reduces but doesn't eliminate exposure.
Related
- Working capital — what the loan funds
- Invoice finance — main alternative
- Factor rate — non-APR pricing
- UK working-capital pricing benchmarks
Frequently asked
What is a working capital loan?
Short-term business borrowing used to fund operating cashflow needs — payroll, stock, rent, VAT — rather than purchase a specific asset. Typically 3–24 months term, £5k–£500k facility size, unsecured or PG-backed.
How is a working capital loan different from a term loan?
Term loan is a generic category; working capital loan is a sub-category for short-term operating cashflow. Shorter duration (under 24m vs up to 7 years), faster decisioning (hours vs weeks), higher APR (16% median vs ~8% secured), unsecured or PG-backed rather than asset-secured.
What are the alternatives?
Invoice finance (advance against receivables), merchant cash advance (against future card sales), revolving credit facility, business overdraft. Each has different cost, duration, and fit.
How much does a UK working capital loan cost?
UK alt-lender Q2 2026 pricing for unsecured £50k: 11%–24% APR, median ~16%. Smaller facilities cluster around 19.5%; larger ones drop to ~11%.