Working capital financing

Working capital is the difference between current assets (inventory, accounts receivable) and current liabilities (accounts payable, current credit). Working capital financing fills temporary gaps between expenses (purchasing, salaries) and income (customer payments). The main forms are: bank overdraft facilities, factoring, accounts receivable financing, and SME credit. For growing SME companies, this is often the difference between smooth running and a cash flow crisis. Below: which form is appropriate when, the costs, and how Karim's operating company weathers growing pains.

The short answer

• What: Financing of a temporary cash flow gap between expenses and income.
• Main forms: current account, factoring, debtor financing, SME credit, supplier redemption.
• When: during growth, seasonal work, long customer payment terms, or large orders.
• Costs: interest 4-12% depending on form and security.
• Combinable: multiple forms common at the same time.

What is working capital?

Formula: Working capital = Current assets – Current liabilities.

Current assets = inventory, accounts receivable, cash, current investments. Current liabilities = accounts payable, VAT payable, current credit, revenue received in advance.

Positive working capital: company can meet short-term obligations. Negative: cash flow problems possible. For growing companies: working capital requirements often rise faster than profit — financing needed.

Five forms of working capital financing

1. Current account credit

Bank offers a credit limit on the business current account — use flexibly up to the maximum. Interest 6-10% on the utilized amount, plus an annual commitment fee of 0.25-1%.

For: flexible cash flow buffer, no separate application per use. Against: relatively expensive, bank requires collateral or a guarantee.

2. Factoring

Sell ​​invoices to factoring company — immediately 80-90% of invoice value. Upon customer payment: remainder minus factoring fee (1-3% per invoice). Can be with or without recourse (factoring company bears the debtor risk).

Pros: quick cash, accounts receivable risk optional. Cons: relatively expensive, customers know that the factor is involved. See factoring.

3. Accounts receivable financing

Bank grants credit secured by outstanding invoices — typically 70-85% of the accounts receivable portfolio. Interest rate 5-8%, plus monitoring costs.

Pros: more discreet than factoring (no factor name on invoice), lower costs. Cons: own debtor risk, bank monitors. See debtor financing.

4. SME credit (small business loan)

Fixed-rate loan €5,000 – €250,000, term 1-5 years, fixed monthly installments. Interest 6-12% depending on collateral and creditworthiness.

Pros: predictable, no reliance on current account. Cons: inflexible, interest also on unused amount. See small business loan.

5. Suppliers' fee

Negotiate with suppliers on payment terms (60-90 days instead of 30) or prepayment discounts. Cheapest working capital — no interest, only time. Limited by supplier willingness.

When which form?

• Unpredictable cash flow peak: current account.
• Many outstanding B2B invoices, immediate need: factoring or accounts receivable financing.
• One-off major investment or inventory purchase: SME credit.
• Seasonal work (high-low): current account with seasonal limit or factoring.
• Good relationship with supplier: try the supplier's recommendation first.

How large does your credit need to be?

Rule of thumb: working capital requirement ≈ 1-2 months operating costs plus accounts receivable turnover.

Example of Karim's operating company:

• Monthly operating costs: € 60,000.
• Average accounts receivable period: 45 days → €90,000 in accounts receivable.
• Safety margin: €50,000.
• Working capital requirement: €200,000.

Combination: €100,000 current account + €100,000 debtor financing provides flexibility.

Bank vs. alternative financiers

• Traditional bank (ING, Rabo, ABN): lowest interest rates, strictest requirements.
• SME fintech (Qredits, October, Funding Circle): higher interest rates (8-15%), faster decision (1-2 weeks).
• Factoring company: quick cash, higher costs.
• Private investor: tailor-made, often with interest + profit sharing.

Honest recommendation

For growing SMEs: working capital financing is basic business hygiene — nothing to be afraid of. Start with a combination of an overdraft facility (€50k-€200k) and negotiate supplier redundancy. With rapid growth: add factoring or accounts receivable financing. A financial advisor (€1,500-€5,000) helps find the optimal mix. Avoid: using the overdraft facility solely for structural working capital needs — too expensive.

For other topics: factoring, accounts receivable financing and small business loan.

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