What is Working Capital Facility?
Short answer: A working capital facility finances the timing gap between operating cash outflows and customer collections. It can take the form of an overdraft, revolver, invoice-finance line, inventory facility or borrowing-base loan. It should fund a cash-conversion cycle or seasonal peak, not be assumed to cure recurring losses or permanent undercapitalisation.
The required amount depends on purchase terms, production or holding time, customer credit, taxes, payroll and seasonality. Growth can increase the gap even when reported profit rises. Facilities differ in recourse, security and control. Invoice finance may advance only against eligible invoices and require collections into a controlled account. Inventory finance applies lower advance rates and reserves because stock can be harder to realise. A general overdraft may be repayable on demand. The committed amount therefore needs to be compared with actual eligibility and renewal terms.
How it works
Build a dated cash forecast covering at least the full operating cycle and seasonal peak. Model receipts from customer-level collection assumptions rather than monthly revenue alone. Include inventory purchases, supplier payments, payroll, tax, capital expenditure, interest and facility fees. Identify the maximum cumulative cash deficit plus a board-approved buffer. For a borrowing base, forecast eligible receivables and inventory after concentration, ageing and other exclusions. Compare required drawings with usable availability each period, then test delayed collections, lower sales, margin pressure and lender reserves.
Indicative facility need = peak forecast operating cash deficit + liquidity buffer - unrestricted cash allocated to the cycle
Example
A distributor pays suppliers 30 days after purchase, holds inventory for 45 days and collects customers after 60 days. Its 13-week forecast shows the lowest cash position at negative 850 before financing. Management sets a 250 minimum cash buffer, so indicated usable facility need is 1,100. A lender offers a 1,300 commitment, but the forecast borrowing base at the peak is only 1,000. The company still has a 100 liquidity gap and must reduce working capital, add another funding source or renegotiate eligibility. The headline commitment does not solve the forecast shortfall.
Why it matters
Working-capital finance can support growth without tying long-term equity to every temporary cash gap. It can also provide resilience when collections fluctuate. Boards use the forecast to decide facility size, supplier negotiations, inventory plans and minimum cash. Lenders assess the self-liquidating cycle, reporting quality, collateral and management discipline. A facility that remains fully drawn through the low season may indicate that part of the need is permanent. Separating seasonal use from structural funding helps management choose between a revolver, term loan and equity.
Documents determine whether the line is committed, repayable on demand, with or without recourse, and subject to eligibility or reserves. Assignment of receivables, customer notification, data protection, stamp duty and security registration vary by jurisdiction. Some customer contracts restrict assignment. Accounting derecognition of receivables depends on transferred risks and control, not the financing label. Tax treatment and covenant definitions also differ. Forecasts should not count disputed, overdue or concentrated invoices as fully financeable. Counsel and accountants should review the structure and treasury should monitor compliance continuously.