Stock finance or a working capital loan: which does your business need?

Both stock finance and working capital loans help a business fund its day-to-day trading, but they solve different problems. Choosing the wrong one can mean paying for flexibility you do not need, or running short just when you do.

Stock finance

Stock finance, sometimes called inventory finance, is used to buy goods you intend to sell, particularly ahead of a busy period or to take advantage of bulk-purchase discounts. Because the funding is linked to a specific purpose, it can be easier to structure around the value of the stock and when you expect to sell it.

• Seasonal retailers building stock ahead of peak trading
• Wholesalers and distributors buying in bulk
• Manufacturers buying raw materials ahead of production

Working capital loans

A working capital loan provides general funds for running the business: paying wages, rent and suppliers, or covering the gap between invoicing customers and actually being paid. It is not tied to one particular purchase, which gives more flexibility in how the money is used.

• Businesses that give customers long payment terms
• Firms with seasonal dips in cash flow
• Companies investing in hiring or marketing ahead of the revenue it will generate

How to decide

Start with what the money is for. If it is a specific purchase of goods you will resell, stock finance may be the better fit. If it is a general timing gap between money going out and money coming in, a working capital loan is usually more suitable. Many businesses find they need both at different points in the year.

What lenders usually look at

• Your trading history and recent accounts or management information
• Business bank statements
• Your existing borrowing and how the new loan fits alongside it
• What the funds are for and how they will be repaid
• Any security or personal guarantees that may be required

Different lenders weigh these factors differently, which is why comparing a range of lenders rather than approaching just one can make a real difference to whether a case is accepted and on what terms.