Protecting cash flow and working capital

Understanding working capital challenges

Cash flow can be unpredictable for small companies.

Unforeseen costs, seasonal fluctuations, and wider economic challenges can all impact business growth.

A well-funded business may be better able to withstand market challenges, seize growth opportunities, operate on a sound financial footing, and be better placed to withstand issues such as:

  • Operational consistency

    Day-to-day operations, from paying wages to settling utility bills, can require funds.

  • Needing a cash buffer

    Invoiced payments, especially in B2B transactions, can sometimes face delays.

  • Seasonal fluctuations

    Funding may help in navigating seasonal periods when revenues might be lower than usual.

  • Inventory management

    Retailers and manufacturers may need funds to stock up on inventory.

  • Opportunistic investments

    Access to funds allows businesses to capitalise on opportunities such as a bulk discount without impacting cash flow.

  • Debt management

    Funding can help ensure that outstanding debts or financial obligations are managed promptly.

  • Expansion

    Whether it’s opening a new branch or launching a fresh marketing campaign, additional funds help ensure that growth opportunities can be seized without jeopardising the existing cash flow.

  • Unforeseen expenditures

    Unexpected expenses, such as equipment breakdowns can arise.

Inventory financing

A key cash flow challenge is when new business owners need to buy inventory before they can sell it.

Finance products that could support inventory financing include:

Purchase order finance

Small businesses can sometimes struggle to fulfil a large order from a customer because they don’t yet have the funds to pay their supplier.

This is where Purchase order financing (PO financing) could help.

The typical process for PO financing is that once a business has been approved by a finance provider, they receive the money and use it to pay their supplier.

Once the order has been delivered to the end customer and an invoice has been sent, the finance provider collects payment from the customer, deducts its fees, and sends the remaining amount to the business that has delivered the order.

Unlike other types of funding, PO financing is available to businesses of all sizes including new and growing start-ups and smaller businesses.

Even businesses with a low credit score or limited credit history may be able to access PO financing because an approval decision is typically based on the creditworthiness of the end customer.

However, PO financing can be an expensive funding option because providers typically charge a monthly fee of between 1.8% and 6%.

The longer your customer takes to pay the invoice, the more fees you will pay.

Find out more about purchase order finance.

Overdraft facilities or revolving credit

These are flexible, short-term funding options that enable businesses to withdraw credit when required.

An overdraft is a line of credit on your business bank account that provides additional cash to the business as required.

An overdraft charges interest only on the amount by which you’re overdrawn, unlike loans which have fixed repayments and interest whether or not you use it.

Flexibility is a key advantage of overdrafts, and they are typically quick and easy to arrange.

However, overdrafts generally have higher interest rates than loans, and if you miss a payment, you might be charged a fee which can affect your credit rating.

Revolving credit is similar to an overdraft, but it is not linked to your bank account.

This means you can access it from multiple lenders.

Like overdrafts, flexibility is a benefit, but revolving credit also involves higher interest rates and fees than loans, and you may need to give a personal guarantee to access it.

Find out more about overdraft facilities and revolving credit.

Supply chain finance

This type of finance helps businesses manage their working capital. It involves a supplier receiving early payment of an invoice by a finance company. The business that has purchased the goods or service then pays the funder once the invoice is due.

Find out more about supply chain finance.

Asset Financing

This allows a business to acquire assets, replace old equipment, or expand operations without putting additional pressure on cash flow or needing to raise a significant amount of working capital before purchase.

To access the funding, a business uses assets on its balance sheet as collateral to fund a purchase.

Asset finance options include:

  • Finance lease

    A finance provider purchases the asset and leases it to a business. The lessee makes monthly repayments. The lessee is also accountable for insuring and maintaining the asset.

  • Contract hire

    This method is often used by businesses purchasing a fleet of vehicles. It provides access to the asset in return for fixed rental payments over a set period. The provider is responsible for sourcing and maintaining the vehicles.

    Asset finance is generally flexible and quick to arrange, but you may face charges if you default on payments or decide to pay off the loan early.

    Additionally, the lender may seize the asset you’ve put up as security and sell it if you fail to make payments.

  • Operating lease

    A business leases an asset over a specified timeframe. They can potentially upgrade to a more advanced model within the rental period. The finance provider is accountable for maintaining the asset.

  • Asset refinancing

    This frees up cash by using assets in your business that you already own (such as machinery, equipment, and vehicles) as security.

    Basically, you transfer ownership of the asset to the lender but keep using the asset, paying the lender back monthly.

    When you have repaid the sum lent by the lender you take ownership of the asset.

    This is why asset refinance is sometimes called a ‘sale and leaseback agreement’.

    Interest charges for asset refinancing tend to be less than other options, and an adverse credit score isn’t usually a problem.

    However, your asset will be at risk if you can’t keep up repayments and it will be more expensive than using your own cash reserves.

    Find out more about asset refinancing.

Late payment

An estimated £23.4 billion in late invoices is owed to UK businesses. It’s a perennial problem that can have a significant negative impact on cash flow.

Finance that could help with late payments includes:

Invoice finance

Tap into the value of unpaid invoices by using them as security against lending.

With invoice factoring, the lending provider offers up to 90% of the value of an invoice and collects payment from the customer before paying the lendee business the remaining balance minus a fee.

Invoice discounting is similar to factoring, but you keep control of customer payments.

If you use the funding, you pay a fee and a discount charge (like interest).

Invoice finance is usually only available for established businesses that trade with other businesses.

If it takes more than 90 days for customers to pay invoices, providers may not approve your application because they will have to wait too long to receive their money.

This checklist could help you decide whether invoice finance is suitable for your business.

Find out more about invoice finance.

Working capital loans

A Working capital loan can provide an injection of funding to manage cash flow challenges.

Secured loans require collateral so the amount you could borrow depends on the assets you can provide as security.

Unsecured loans are also available, but you’ll likely have to give a personal guarantee and will need a good credit rating.

Find out more about working capital loans.

Other finance solutions that can protect cash flow and working capital:

Buy Now Pay Later (BNPL)

These schemes allow customers to delay full payment for products or services which can encourage them to make a purchase they might otherwise not have made.

If a customer misses a payment, they are charged interest and may also incur a late payment fee.

Businesses are charged a fee for each completed transaction.

This is usually between 2% and 8% of the total amount.

Find out more about BNPL.

Merchant cash advance

A Merchant cash advance (MCA) is for businesses that accept debit and credit card payments.

Lenders provide a business with a sum of money, which it then repays using a percentage of card transaction sales, plus fees.

MCAs have an advantage over traditional loans in that they can be accessed without needing to provide assets for security, such as property or inventory.

However, MCA fees and interest rates tend to be higher, and if payments aren’t met, businesses can be at risk of being unable to service their debt.

Find out more about merchant cash advance.


This is funding provided by public sector and private organisations that doesn’t have to be paid back.

Grant schemes are usually focused on factors such as a specific business activity, stage of business, sector, founder demographic and location.

Some grants can be used to deal with cash flow challenges.

Grant schemes vary in how much money you could receive.

For some, you’ll receive the full amount, whereas for others you need to match a proportion of the value of your grant before you receive it.

Application processes can be long and time-consuming, and there is no one-size-fits-all approach.

Before applying, it is advisable to speak to the grant provider to find out what’s involved and whether you’re eligible.

Sources of grants include the government’s finance finder, the find a grant service, and the websites of local councils.

Find out more about grants.

British Business Bank plc is a development bank wholly owned by HM Government. British Business Bank plc and its subsidiaries are not banking institutions and do not operate as such. They are not authorised or regulated by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA). A complete legal structure chart for the group can be found at

Whilst we make reasonable efforts to keep the information in this guide up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.

Worth knowing

An estimated £23.4 billion in late invoices is owed to UK businesses, but there are finance solutions that can help companies tackle the cash flow challenges.

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