Every working capital problem feels the same from the inside: not enough cash in the account this month. But cash gaps come in different shapes, and the shape decides which finance product actually fixes it. A gap caused by slow-paying customers needs a different tool to a gap caused by a seasonal dip or a one-off cost. This guide walks through the diagnosis a broker would run with you, then routes each shape of gap to the product built for it.
What is working capital finance?
Working capital finance is funding that covers the gap between paying for stock, staff and suppliers and getting paid by your own customers. It is an umbrella term rather than a single product: lines of credit, invoice finance, unsecured term loans and merchant cash advances all sit under it, and each suits a different shape of cash gap.
That umbrella point matters more than it sounds. Most pages ranking for working capital finance in Australia belong to single lenders, and each presents its own product as the answer. A line of credit provider will tell you the answer is a line of credit; an invoice finance provider will tell you it is invoice finance. Neither is lying. Each is simply selling the one tool on its shelf. A broker's job is different: work out what shape your gap is first, then pick the tool.
How do you diagnose your working capital gap?
Before comparing any products, answer three questions about the gap itself:
- Is it one-off or recurring? A single known cost (a tax bill, a fit-out, a bulk stock buy) is a different problem to a gap that reopens every month.
- Is it predictable or random? A seasonal dip you can see coming every year is plannable. A gap that appears whenever two big customers pay late in the same week is not.
- What is causing it? Growth eats cash because you pay for stock and wages before the new revenue lands. Seasonality front-loads costs before the busy period. Slow-paying customers trap your cash in invoices. Each cause points at a different product.
Write the answers down as one sentence: "My gap is recurring, roughly predictable, and caused by customers taking their full trade terms to pay." That sentence does most of the product selection for you, as the next four sections show. And if you cannot finish the sentence, that is normal. Working out the shape of the gap is literally the first thing we work out on a call: book a call and we will do it with you.
When is invoice finance the right fix?
The shape: sales are fine, but the cash is trapped in unpaid invoices because you sell to other businesses on trade credit terms.
Invoice finance advances you most of an invoice's value when you issue it, with the balance, less fees, following once your customer pays. It fits B2B businesses whose gap is genuinely debtor-driven: the work is done, the invoice is out, the money is just slow. It does not fit businesses that sell to consumers, take payment at the till, or invoice without credit terms, because there is no debtor book to fund. If slow payers are your gap, start with our invoice finance page.
When does a line of credit fit?
The shape: the gap is recurring but irregular. Some months you need nothing, some months you need cover, and you cannot say in advance which will be which.
A business line of credit gives you an approved limit you draw on when needed and repay as cash comes in. You pay interest on what you have drawn, typically plus a fee for keeping the facility available. That structure is the point: a cost you only sometimes have gets matched to a facility you mostly pay to use, with a standing cost for the availability itself. The common follow-up question is whether a term loan works out cheaper. Sometimes it does, and the answer turns on how often you would actually draw: our term loan vs line of credit comparison works through it.
The shape: the gap is one-off and you can put a number on it. A tax bill, a stock buy ahead of your season, a deposit on bigger premises.
When the amount is known and the purpose is finite, an unsecured business loan usually fits better than a revolving facility: you borrow the figure once, repay it on a schedule, and the debt has an end date. The discipline that matters is matching the loan term to the life of the thing you are funding. Stock you will sell this season should not still be costing you repayments long after it has left the shelf.
Where does a merchant cash advance fit?
The shape: your takings run through the card terminal, they swing week to week, and fixed repayments are exactly what your cash flow struggles with.
A merchant cash advance repays as a percentage of daily card sales, so quiet weeks repay less and busy weeks repay more. The honest framing, which we also give on the product page: it is generally the dearest tool under the working capital umbrella, for a structural reason: the provider holds more risk, without asset security and with repayments that slow when your trade does, and prices for it. It still earns its place for some card-heavy businesses, typically hospitality and retail, where the flexible repayment genuinely matches the revenue pattern and cheaper products are not currently available. If you would qualify for a line of credit or a term loan, price those first.
How do you work out how much working capital you need?
Count days before you count dollars. The method is called the cash conversion cycle, and in plain English it is three numbers:
- How many days does stock sit before it sells?
- How many days do customers take to pay you?
- How many days do you take to pay your suppliers?
Add the first two, subtract the third. The result is the number of days your own money is tied up funding the business before it comes back as cash. Multiply those days by your average daily operating costs and you have a working estimate of the gap a facility needs to cover.
Two cautions. First, use real numbers: the days customers actually take to pay, not the terms printed on your invoices. Second, treat the result as a starting estimate, not a borrowing target. Our borrowing power calculator can help you sanity-check a facility of that size against your revenue; it produces estimates only, and every lender makes its own assessment of every application.
When is working capital finance the wrong fix?
Here is the section a lender's product page will not give you. If the gap grows every cycle, borrowing does not close it; borrowing feeds it. Finance moves cash across time. It cannot fix a margin that is too thin, prices that have not moved with costs, customer terms that are too generous, or debtors nobody chases. In those cases a facility just delays the harder conversation and adds a funding cost while it does.
Signs the gap is structural rather than seasonal: the amount you need creeps up each time, you are borrowing to cover repayments on earlier borrowing, or short-term facilities have stacked on top of each other. Where facilities have already stacked, debt consolidation may simplify the position while you fix the underlying cause. But fix the underlying cause. A broker who arranges a bigger facility each time without asking why is not doing you a favour.
Frequently asked questions
What is the difference between a working capital loan and a business loan?
Mostly framing. Working capital describes what the money is for, day-to-day operating costs, rather than a distinct product. A working capital loan is usually a term loan or line of credit used for operating costs, while business loan covers any borrowing for any business purpose, including assets and property.
How much working capital does a small business need?
There is no standard figure; it depends on how long your cash stays tied up. Work it out from your own cycle: days stock takes to sell, plus days customers take to pay, minus days you take to pay suppliers, multiplied by daily operating costs. That estimate beats any rule of thumb.
Is an overdraft working capital finance?
Yes. A business overdraft is one of the tools under the working capital umbrella: it lets your transaction account run below zero up to a limit, which suits small, brief, irregular gaps. A standalone line of credit does a similar job with different structure and pricing, so compare the two before choosing either.
Can a new business get working capital finance?
It is harder, because most working capital products are assessed on trading history that a new business does not have yet. Some routes open earlier than others, and knowing the difference saves months. Our guide to business loans for startups walks through what is realistic and when.
121 Brokers is a finance brokerage, not a lender. We compare options across a panel of lenders, and because we are not selling one product, we can start from your gap rather than from a shelf. Tell us the shape of the problem and we will show you the products that fit it, including the honest news if the best answer is not borrowing at all. Compare my options.
General information only, not financial advice and not a recommendation of any product. Product features and criteria vary by lender; every lender assesses each application on its own facts and makes its own decision. Consider your circumstances and seek professional advice where appropriate.
