Working capital finance: options for Australian businesses
Working capital finance covers the funding used to meet day-to-day operating costs such as stock, wages, suppliers and tax, while payment is still owed to you. The main options in Australia are lines of credit, invoice finance, short-term business loans, trade finance and overdrafts. The right one depends on why the gap exists and how long it lasts.
- Diagnose the cause of the gap before choosing a product.
- Recurring gaps suit revolving facilities; one-off gaps suit short-term loans.
- If you invoice other businesses, invoice finance is often the cheapest route.
- Working capital finance treats symptoms. Persistent gaps need a pricing or terms fix.
Why working capital gaps happen
Almost every gap traces to one of four causes, and the cause determines the fix.
- Payment timing. You pay suppliers and staff before customers pay you.
- Growth. A larger order book ties up more cash in stock and labour before revenue lands.
- Seasonality. Costs are level and income is not.
- A one-off shock, such as an equipment failure, a lost quarter or a tax bill.
The cause matters, because a revolving facility is the wrong answer to a one-off shock, and a one-off loan is the wrong answer to a structural timing gap.
The main options compared
| Option | How it works | Best for |
|---|---|---|
| Line of credit | Revolving limit, interest on drawn balance | Recurring and unpredictable gaps |
| Invoice finance | Advance against unpaid invoices | Businesses invoicing other businesses on terms |
| Short-term loan | Lump sum over 3 to 24 months | A defined one-off gap |
| Overdraft | Buffer attached to the trading account | Small day-to-day fluctuations |
| Trade finance | Funds supplier payments and shipping | Importers and wholesalers |
Several of these can sit alongside each other. It is common for a growing wholesaler to run trade finance for stock, invoice finance against the debtor ledger, and equipment finance for plant, each priced for its own security.
What working capital finance costs
Pricing varies more widely here than in any other part of business lending, because the products are structurally different. A short-term unsecured loan and an invoice finance facility are not comparable on rate alone.
Compare on total cost over the period you will actually use the money, and on the fee structure: drawdown fees, line fees, invoice discount rates and minimum terms all shift the real number.
Using it well
- Size the facility to the gap, not to the maximum available.
- Match the term to the cycle, a 90-day receivables gap does not need a three-year loan.
- Keep the facility for working capital. Funding assets from it is expensive.
- Review annually. Facilities arranged when the business was smaller are often repriceable.
- Watch for a persistent, growing gap. That is a margin or payment terms problem, and finance only delays it.
Invoice finance in more detail
Invoice finance is the option most often overlooked by businesses that would benefit from it. If you invoice other businesses on payment terms, your debtor ledger is an asset a lender can advance against, and that security usually makes it cheaper than unsecured short-term borrowing.
It comes in two broad forms. Under an invoice discounting arrangement you continue to manage your own collections and your customers deal only with you. Under a factoring arrangement the financier takes on collections, which reduces your administrative load but means your customers are aware of the facility.
What lenders assess
- The quality of your debtors. Large, creditworthy customers support a better facility than a ledger of small accounts.
- Concentration. A ledger where one customer represents most of the value carries more risk.
- Your invoicing discipline, including whether invoices are raised promptly and disputes are rare.
- Dilution, meaning the proportion of invoiced value that is never collected because of credits, returns or disputes.
It does not suit every business. If you sell to consumers, take payment at the point of sale, or work on progress claims that are contested, the ledger is not the right security and another structure will fit better.
Timing problem or structural problem
Working capital finance solves a timing problem well. It does not solve a margin problem, and telling the two apart early saves a great deal of money.
A timing problem shows up as a gap that closes. Receipts arrive, the facility is repaid, and the cycle repeats at a similar level. A structural problem shows up as a gap that grows: the facility is drawn a little further each quarter, repayment never quite happens, and each renewal is for a larger limit.
Signs the problem is structural
- Utilisation rises steadily over several quarters with no seasonal explanation.
- You are using new borrowing to meet repayments on existing borrowing.
- Payment terms to suppliers are being stretched at the same time.
- Turnover is growing but the cash position is not improving.
- ATO obligations are the recurring reason for drawing on the facility.
Where any of these are present, the useful work is on pricing, payment terms, and the cost of delivery rather than on the facility. Finance can buy the time to make those changes. It cannot substitute for them, and a larger limit taken instead usually makes the eventual adjustment harder.
Arranging a facility
BizLend is an accredited finance broker with a panel of more than 70 lenders, and has arranged over $300 million in residential and business lending. We fund business facilities from $50,000 to $5 million.
Start with where the cash is going and when it comes back. The right structure usually follows from that. A quote is free and carries no obligation.
Frequently asked questions
What is the difference between working capital finance and a business loan?
Working capital finance is a category of short-term funding for operating costs, usually revolving or short-term. A business loan is typically a fixed-term facility for a defined purpose such as an asset purchase or expansion.
Can I get working capital finance without security?
Yes. Many short-term and revolving facilities are unsecured, assessed largely on turnover and bank statements, and priced accordingly. Directors are usually asked for a personal guarantee.
How quickly can working capital be arranged?
Short-term unsecured facilities can often be decided within a day or two where documentation is complete. Secured and larger facilities take longer because of valuation and documentation.
Is invoice finance cheaper than a loan?
It is frequently cheaper than unsecured short-term borrowing because the debtor ledger provides security, but it only works if you invoice other businesses on payment terms.