What are they?
Working capital grants can help fund businesses who want to make sure that their operational cash flow is strong so that they may pursue new business opportunities, cover one off costs, pay for business expenses, fulfil an unusually large order or contract or gain access to finance to keep things going to cover seasonal fluctuations in trading conditions.
A working capital injection can help businesses carry out their short-term goals or access more resources faster than if they were relying on their existing financial resources, or help them remain solvent in times of crisis. More often than not this non-repayable money comes from a Government source or other business support organisations.
What do they pay for?
Businesses may seek grants to pay towards a range of working capital expenses to help assist in short-term day to day activities, which are briefly outlined below.
- Manage Cash Flow – Cover general short term cash flow issues
- Bridge Delayed Payments – Cover cash-flow shortfalls and bridge the gap in the case of delayed payments from clients
- Fund Important Purchases – Access funding to make larger one-off purchases that can help improve your business operations
- Repairs, Updates and Upgrades – Access funding to make unexpected repairs, carry out updates to business facilities or make important upgrades to improve operations
- Cover Seasonal Shortfalls – Access funding to keep business activities stable during quieter periods of the year due
- Unexpected Expenses and Business Emergencies – Access crisis funding to cover unexpected business expenses or to deal with emergencies that would otherwise disrupt operations
- Expansion Purposes – Access funding to cover short term expansion projects to grow your business
- Sufficient Inventory – Cover cash-flow to make sure you can purchase sufficient inventory in the case of unexpected large orders or changes indemand of key items
- Payables – Cover cash-flow to make sure you can cover paying any priority bills or invoices
- Finance Daily Operations – Cover cash-flow to pay for daily operational activities, including paying wages, transport costs or general expenses
What type of alternative funding is available for working capital?
If businesses cannot readily access a grant in their sector or region that fits their needs, then the alternative is to take on dedicated working capital loans, which can typically be accessed from private commercial lenders.
There are a number of different working capital loan products available:
- Working Capital Loans – A traditional standard working capital loan can provide short to medium term funding on a secured on unsecured basis
- Overdrafts – A business overdraft can be used as an unsecured method of getting access to short-term working capital
- Revolving Credit Facilities – You can gain access to a pre-approved source of funding from a commercial lender and can be used on-demand when required to bridge a gap in working capital, with interest only paid if you have an outstanding balance
- Invoice Finance – Get access to funding owed to you early by your clients via an invoice finance facility. The money can cover short term cash flow issues if clients are often slow making payments
- Asset Refinancing – Get a secured loan against your valuable business assets, which can help bridge a short term working capital issue if you are unable to access sufficient finance via an unsecured business loan
- Merchant Cash Advances – If your business accepts card payments, you may access a cash advance based on the percentage of your average monthly card revenue. Repayments are also taken as a percentage of future card revenue.
- Tax Bill and VAT Funding – Get a specialist loan to cover a larger than usual tax or VAT bill that would otherwise put a strain on your working capital
What are the pros and cons of a loan vs a grant?
Grants – What are the Pros and Cons?
Advantages of taking a grant
- Grant funding is non repayable and means there is no pressure on business cash flow moving forward compared with repaying loans and their associated interest.
- Grant funding typically targets specific areas of working capital requirements or can allow you to address particular issues, such as short-term finance to cover the effects of Covid-19 disruption and lockdown closures.
- If you are awarded a grant from a government backed scheme or enterprise support body, this is considered a vote of confidence from the awarding body in question and means they have backed your business proposition as one that is highly likely to succeed. Details of your receiving an award is often publicised in local press or trade publications and this can be used as a promotional tool to secure new business.
Disadvantages of taking a grant
- Grants usually only offer a percentage of total funding needed for a project, so in some cases you may need to cover any additional working capital shortfall with a private alternative finance source. In many cases in the UK match funding of 50% is typical.
- Access to grants is highly competitive, especially in the case where major business disruption is taking place, such as with Covid-19. As the money is free you will be competing against other businesses and will need to stand out from the rest of the applicants or show a real need to be awarded funding.
- Grant funding pots are often restricted to specific sectors or regions, so it means if you do not operate within that sector or geographic region then you are not able to access the funding. Some areas and sectors have less funding than others.
- Grants often come with terms and conditions and restrictions, which means you are only allowed to spend the money on what you specifically applied for. Evidence must be provided to show where the money has gone and sometimes the grant is only released as a reimbursement after the project has been completed.
- It is harder for less established SMEs to access money from grants. More often than not a business needs a track record to prove they will make good use of the money and not see the project or their business fail.
Loans – What are the Pros and Cons?
Advantages of taking a loan
- Loans will typically cover your entire working capital costs meaning you will not need to seek additional funding from elsewhere.
- Loan funding is flexible and can be used for any working capital activities and there are typically no restrictions on what areas you may spend the money on that would otherwise be restricted if you were using a grant.
- Loans are not limited by sector and means that certain businesses traditionally excluded from grant opportunities can more easily access this type of finance.
Disadvantages of taking a loan
- Whenever you borrow a loan, you must always pay that money back over a period of time with interest (where applicable) and this can put a strain on business cash flow in the future if trading conditions become tough.
- There are some cases where interest rates for less established businesses can be higher due to the greater level of risk and unsecured nature of the loans for those without a proven track record. Businesses with a good relationship with their bank can typically negotiate to get a better interest rate.
- If you are trying to seek a loan when your business is already facing financial difficulties, there is a chance that you may be refused a loan if your business is deemed too high a level of risk. Access to traditional commercial loans can also “dry up” when there are difficult economic conditions taking place across the UK.
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