Quick answer
A working capital loan funds the day-to-day costs of trading, such as stock, wages and supplier bills, while you wait for customers to pay. It's usually unsecured, sized on turnover and bank statements, and repaid over months rather than years. The right amount comes from your cash conversion cycle: the days money is tied up in stock and unpaid invoices, minus the days your suppliers give you.
Key points
- Funds trading costs, not long-life assets, so terms are usually measured in months
- Size it from your cash conversion cycle rather than guessing a round number
- Fast growth eats working capital: more sales means more cash tied up before you're paid
- A revolving facility often suits a recurring gap better than a one-off lump sum
- Check how quickly big customers actually pay before you fund a contract with them
- Typical amounts
- $5k to $500k, scaled to turnover
- Typical term
- 3 to 24 months, or revolving
- Security
- Often unsecured with a director guarantee
- Sized on
- Turnover, trading cycle, bank statements
A business can show a healthy profit on paper and still struggle to make payroll. Usually the money exists; it’s parked in a warehouse as stock, or in a customer’s accounts payable queue as an invoice due in 60 days. Meanwhile wages, rent and suppliers want paying this week. That timing mismatch is what working capital finance exists to cover.
The hard part isn’t finding a lender. It’s borrowing the right amount in the right shape, so the facility actually closes the gap instead of becoming one more repayment. That starts with understanding your own trading cycle.
What is a working capital loan for?
Working capital is the cash cushion that keeps the doors open day to day: current assets such as cash, stock and receivables, less the bills falling due soon. A working capital loan tops up the cash part when the rest is tied up.
Typical uses:
- Loading up on inventory before peak trading or a bulk order
- Paying staff and contractors while invoices are outstanding
- Taking an early-payment discount from a supplier
- Covering a temporary dip when a major customer pays late
- Carrying the set-up costs of a fresh contract until the first claim is paid
What it shouldn’t fund: long-life assets (use equipment finance), a business purchase, or a business that loses money every month. Borrowing more doesn’t fix a margin problem. It just delays the reckoning, at a cost.
How much cash does your trading cycle tie up?
This is the single most useful calculation for a working capital loan, and few owners have ever done it. It’s called the working capital cycle or cash conversion cycle:
Days in stock, plus days to collect, minus days you’re allowed to owe = days your cash is locked away
- Days in stock: the average time goods spend on your shelves or in the warehouse before a sale
- Days to collect: the average gap between sending an invoice and seeing the money (often called debtor days)
- Days you’re allowed to owe: the credit your own suppliers extend before their bills fall due
Multiply the result by what you spend each day on stock and direct costs, and you have the cash the cycle absorbs.
A worked example. Picture a Melbourne food distributor selling to cafés and corner grocers. Its stock sits for about 40 days. Customers pay in an average of 48 days. Suppliers give 30-day terms. So its cash is tied up for 40 + 48 − 30 = 58 days.
It spends roughly $1.46m a year on stock and direct costs, which is about $4,000 a day. Over 58 days, the cycle locks up around $232,000. The business normally holds about $140,000 in the bank, leaving a structural gap of roughly $92,000 that shows up as a squeeze every month before the big customers pay.
A loan of about $100,000 (the gap plus a small buffer) would cover it. Borrowing $250,000 because a lender offered it would just add cost.
Our working capital ratio calculator gives a quick read on your overall position, and the cash flow gap calculator helps measure the size and timing of a specific shortfall.
Why does growth make it worse?
Here’s the part that catches growing businesses off guard. Using the same wholesaler: if sales rise 25%, daily spend on stock climbs to around $5,000. The cycle still runs 58 days, so it now ties up about $290,000. The business needs $58,000 more working capital simply because it’s selling more, before it’s banked a dollar of the extra profit.
That’s why owners describe being “busier than ever and always broke”. It’s also why a lender’s questions about growth plans aren’t nosiness: they’re trying to work out whether the facility you’ve asked for will still be big enough in six months.
Three levers reduce the cash a cycle needs without borrowing at all, and business.gov.au’s cash flow guidance covers each in more depth: invoice promptly and chase overdue accounts, keep stock lean, and negotiate longer terms with suppliers. Shaving ten days off debtor days in the example above frees up around $40,000.
Want help working out what your cycle really needs? Send us the outline and a specialist will talk it through; asking won’t touch your credit file.
Before you fund a big contract, check how the customer pays
When a working capital loan is funding work for one large customer, that customer’s payment habits become your risk. Australia has a useful public tool here. The Payment Times Reporting Scheme requires big companies to disclose their payment terms and the speed at which they settle invoices from small suppliers. Anyone can look those disclosures up on the Payment Times Reports Register.
The small business ombudsman (ASBFEO) suggests using the register to see a prospective customer’s typical payment terms and performance before you start work. If a customer reports paying most small suppliers in 60 days or more, size your facility for that reality rather than the 30 days on your invoice. Our guide to funding a big contract walks through the rest of that planning.
Lump sum or revolving facility?
Lenders attach the label “working capital loan” to quite different products. Picking the structure deserves as much thought as picking the figure.
| Facility | Mechanics | Suits you if |
|---|---|---|
| Short-term lump sum loan | Borrow once, repay weekly over months | A single shortfall with an obvious finish, for example pre-season stock |
| Line of credit | Take funds when required, pay back, reuse the limit | The gap recurs every month or quarter |
| Invoice finance | Advance against unpaid invoices | Cash is tied up in receivables from business customers |
| Trade or stock finance | Pays suppliers directly for stock | Stock days are the main problem, often for importers |
| Business overdraft | Revolving limit on your transaction account | Your existing bank is willing to offer a limit |
Banks are excellent at working capital when you fit their criteria; an overdraft from your own bank is often the cheapest version of all. If your bank declined or offered less than you need, online lenders and invoice financiers are the usual next step, typically assessing you on bank statements rather than full financials.
What do lenders want to see?
| Item reviewed | The underwriter’s real question |
|---|---|
| Bank statements (6 to 12 months) | Consistent deposits, few dishonours, room for another repayment |
| Aged receivables and payables | Whether customers pay reliably and you aren’t stretching suppliers too far |
| Trading history | Commonly six months or more with online lenders |
| Concentration | How exposed you are if your largest client walks away |
| ATO position | Tax debt on a plan and being kept up is usually workable |
| Purpose and sizing | A request that matches your cycle reads far better than a round number |
Turning up with your cycle calculation already done (stock days, debtor days, creditor days and the resulting gap) makes the assessment faster and the offer more likely to fit.
What does working capital finance cost?
Cost depends on the structure. A short-term loan usually has a fixed total cost and an establishment fee. With a line of credit you pay on whatever is drawn, plus a line or service fee. Invoice finance charges a discount or service fee on the invoices funded. We don’t quote rates; compare total dollars across the time the money will really be out.
One practical point: a line of credit can be cheaper overall even if its pricing looks higher, because you only pay while the money is drawn. If the wholesaler above needs $100,000 for three weeks each month rather than all year, a revolving facility likely beats a lump sum. Our comparison of cash flow finance options looks at more of these trade-offs.
Know your gap? Let’s size the right facility
Working capital lending works best when the amount is grounded in your own cycle and the structure matches how often the gap appears. We look at both on every enquiry, and it’s often where we save owners the most.
The form asks for about sixty seconds of your time, and reaching out leaves your credit report exactly as it was. What you share is handled by our own people, not passed down a chain of funders. A specialist goes through your situation and gives you a call to talk about amount, structure and timing. Accurate turnover, debtor and stock figures help us suggest the right facility the first time round.
Frequently asked questions
What counts as working capital?
Working capital is current assets (cash, stock, money owed by customers) minus current liabilities (supplier bills, short-term debt, tax due soon). A working capital loan tops up the cash side when too much is tied up in stock and receivables.
How much working capital finance should I borrow?
Start with your cash conversion cycle. Add debtor days and stock days, subtract creditor days, then multiply by your average daily spend on stock and direct costs. That gives the cash your cycle ties up. Borrow the shortfall between that figure and the cash you already hold, plus a modest buffer.
Is a working capital loan the same as a line of credit?
Not quite. A working capital loan is often a lump sum repaid on a schedule. A line of credit is a revolving limit you draw and repay as needed. Both fund working capital, and many lenders use the terms loosely, so check which structure the offer actually is.
Can a new business get a working capital loan?
It's harder. Online lenders typically want at least six months of trading and steady monthly deposits. Businesses under that may need to look at equipment finance for specific assets, a secured loan, or a guarantor.
Should I use a working capital loan to pay tax?
It can make sense for a one-off bill when the business is otherwise healthy, especially to avoid enforcement action. If tax debt keeps building, the problem is usually margins or cash management, and an ATO payment plan or professional advice may be the better first step.