Working capital loans: how to get started

If you’re searching online for working capital loans, you’ll probably relate to one or more of these struggles:

• You need cash for your daily business needs, but you’re in the ICT or SaaS industry with lots of customers but no tangible assets. This makes it harder to get funding from a traditional source like a bank.
• You’re in a position where you need immediate access to cash, which is usually difficult to achieve with traditional financing options.
• You want repayment flexibility but it’s hard to do when your funding source is your bank. 
• You’re based in Ireland and want a funder that can cater to you and understands your market. 

In this article we’re going to look at different types of working capital loans, plus a couple of options that might work better for your situation: revenue based finance and line of credit. We’ll cover:

• Working capital loans: what are your options?
• Flexible options to suit your business: revenue based financing and line of credit
• What do we do and why work with Financefair?
• How Zeus Scooters used revenue based financing to expand into new territories
• Manage your cash flow more efficiently and grow faster with Financefair

Note: looking for working capital financing? Reach out to us.

Working capital loans: what are your options?

A working capital loan is usually a short term option, lasting less than 12 months. If you’re searching for working capital loans and trying to understand what options are available to you, you’ve probably already tried talking to your bank to secure funding and are looking for an alternative business loan. 

In Ireland, there aren’t many providers of working capital loans, but here’s a quick look at some of the options available and who provides them:

• Small business loan or term loan: An amount of money that’s paid back in regular payments over a fixed period of time, with interest added. Small business loans are widely available from traditional banks to peer to peer online lenders. 
• Invoice discounting (or invoice factoring): A provider lends cash to a company up to a certain percentage of its unpaid invoices. Providers include Financefair, Bibby and Close Brothers. 
• Overdraft: An overdraft or line of credit on your business bank account gives you access to additional money for purchases over what’s in your bank account. You’ll usually pay higher interest rates on the amount you use and other fees normally apply too. 

Here are some of the pros and cons for these solutions: 

Just as businesses with a debtor book can use their receivables to secure funding, you can also unlock funding from your customers’ future recurring revenue, as we’ll get into now.

Interested in what working capital financing options are popular with other businesses?Find out in our article on the latest business loan statistics

Flexible options to suit your business: revenue based financing and line of credit

While working capital loans work well for some businesses, here are two lesser known but highly established options that offer more flexibility and could be an even better choice for your business:

1. Revenue based finance: how it can fund your business 

Revenue based finance (RBF) unlocks liquidity that’s trapped in the future contracted and non contracted revenue you have in your business. A RBF provider puts a value on your revenue and then converts it into a working capital funding line that you can use to grow your business.

Revenue based finance is designed for businesses that don’t have tangible assets but do have customers and recurring contracted and non-contracted revenue – for example, a subscription-based business. Revenue based finance is a popular SaaS financing solution. 

With traditional funding, you’d typically go to your bank with a set of projections and get a short term loan based on the bank’s assessment. Then, depending on how your business performs compared to your projections, you might either need to renegotiate lower repayment terms or an extension to the facility due to business growth.

Revenue based finance is based on your future cash flow and is directly aligned to the ebb and flow of your business revenue. This means your repayments can increase and decrease depending on the amount of revenue each month, as opposed to other options like a short term loan which is a fixed amount with fixed repayments. 

How does it work in practice? Here’s how we do it at Financefair:

We look at your projected income for the next 12 months and your expected growth rate. Based on those numbers, we can offer up to 20% of Annual Recurring Revenue (ARR), or 70% of your quarterly income. We can then advance the funds on a quarterly or monthly basis, and adjust the funding based on how much you’ll grow.

Here’s how RBF works in a growing business:

• Let’s say your business’ assumed sales growth rate is 25%, with month 1 bringing in revenue of €250,000.
• With a growth rate of 25%, here’s the expected income for the next 6 months:

• Let’s say we’ve agreed to advance funds of your first 3 months of income, and then every month after that.
• Month 1, Day 1, we’ll advance 70% of your first 3 months of income
  • That’s M1 + M2 + M3 = first advance. So €250,000 + €312,500 + €390,625 = €953,125
  • Then 70% of those months combined. So 70% of €953,125 = €667,188
  • Month 1, Day 1, we’ll advance €667,188
• At the end of Month 1, when you receive your expected €250,000 income, and will therefore be able to repay 70% of the funding Financefair advanced in the first month.
  • That’s 70% of your M1 income. So 70% of €250,000 = €175,000.
• End of Month 1, you’ll repay €175,000.
• We’ll now be advancing funds on a month to month basis.
• We’ll look at your projected income in Month 4, which would be €488,281.
• At the end of Month 1 or beginning of Month 2, we’ll then advance 70% of your Month 4 projected income.
  • 70% of €488,281 is €341,797.
  • Beginning of Month 2, you’ll receive €341,797 in funding from Financefair.
• At the end of Month 2, you’ll receive the expected €312,500 in income, and will repay 70% of the income received in the second month.
  • That’s 70% of your M2 income. So 70% of €312,500 = €218,750
  • End of Month 2, you’ll repay €218,750.
• Then, we’ll look at your projected income in Month 5, which would be €610,35.
• At the end of Month 2/beginning of Month 3, we’ll then advance 70% of your Month 5 projected income.
  • 70% of €610,352 is €427,246.
  • Beginning of Month 3, you’ll receive €427,246 in funding from Financefair.
• This continues for every subsequent month.

As you can see with this example, the funding you’re advanced acts as a revolving line of credit based on your projected income of the next month, which allows you to use your own revenue to fund your growth.

The advantages of choosing revenue based financing are:

• A lot of flexibility: If your revenue grows, the funding amount can also grow, but we can also dial back the funding amount and repayments in slower months (based on our discussion every 3 months). It just takes a conversation. 
• It’s a line of funding that’s directly related to the growth of the business. This gives you a lot of scope for further funding. 
• It’s non-dilutive and gives you time to grow your ARR. If you’re using RBF to grow, a higher ARR drives a higher company valuation which will translate into a lower level of dilution if you raise equity.
• No need for additional applications: You don’t have to worry about getting the amount of funding right first time, not knowing what opportunities might come up for your business in future. We know the amount you request may need to change, and if you need more money for more growth opportunities, there’s no need to fill in another application like you would if you wanted to extend a loan with a bank or other provider. 

Interested in learning more about whether RBF could work for you? Reach out to us to learn more.

2. Line of credit: how it can fund your business

Line of credit (LoC) facilities are a type of working capital loan. It usually acts like a digital overdraft, which gives you access to instant working capital you can draw down whenever you need it. 

We think of a business line of credit funding as being driven by key events in the business. In other words, LoC is great for when you see a big opportunity for your business that would require additional funding to fulfil. For example, it makes for a flexible ecommerce financing source that allows you to order a bigger than average bulk order of stock in order to fulfil a new contract.

Why choose a line of credit over a traditional bank overdraft? In general, line of credit providers can offer bigger amounts of funds than a traditional bank – at Financefair, we offer up to €250,000 per 12 months. 

It’s also a lot more flexible: if you need more funding it’s much easier to arrange than if you had an overdraft or short term loan with a bank where you’d have to fill out a new application to secure more money.

Receiving funds from a line of credit is straightforward once you’re approved: whenever you need the funding, you upload an invoice and get the funds directly sent to your bank account. 

The big advantage there is that you don’t have to divert all your customers’ payments to a separate bank account as you would with invoice financing. Instead, you can simply draw down whenever you need financing.

Read this article to find out more about line of credit.

Revenue based financing vs line of credit: which one might work best for your business?

To summarise, revenue based financing is generally best for companies:

• With predictable recurring revenue.
• That are looking ahead to scaling/growing.
• Looking to better manage their working capital cycle, rather than operating month to month.
• Who don’t necessarily have blue chip debtors but have recurring revenue.
• With a few ongoing contracts, a couple more about to start, and a few more they want to win. In other words, the customer pipeline is there, but you need to know there’s some extra money available to deliver on these contracts. 
• Thinking about raising equity in the future. There’s no need to give away equity if you use revenue based financing, but this type of financing can also be used alongside VCs, private equity and other types of investors.

Line of credit is usually more suitable for companies:

• Who need a cash injection for a project or business milestone.
• That value and need flexibility.
• That don’t want to go with purchase order finance, trade credit and other invoice financing methods and have to deal with the friction that comes with that – for example diverting all payments to a separate bank account.
• That don’t want to wait for months to get a response on a small business loan and get funding immediately. 
• That have a debtor book with a lot of customers. LoC is easier to manage than traditional invoice discounting when you have hundreds of customers, for example.

What do we do and why work with Financefair?

Financefair (formerly InvoiceFair) was founded by a team of experienced industry experts with the aim of offering ambitious businesses tailored working capital solutions to help them grow faster.

Since 2015, we’ve been helping companies in Ireland with invoice finance, revenue based financing and business line of credit. We provide the working capital required to allow these companies to capitalise on their market opportunities with fit for purpose funding. 

Here’s what you’ll get when you work with us:

Get a decision within 24 hours thanks to our experienced team

Our experienced team and streamlined processes mean we can get a response for you within 24 hours. 

Once your application has been approved, we can release funds within 24 hours. This is because we use technology to get read-only access to your most recent accounting and open banking information which gives us a real-time view on your finances and therefore a much more accurate understanding of your funding requirements. 

Our team has years of financial services experience, with the breadth and diversity of our industry knowledge and track record overlaid with access to real-time data, we ensure to evaluate, approve and monitor risk effectively. 

Scale your business with flexible and established products 

We’re the only financing providers that offer revenue based financing and business line of credit in Ireland. 

That means that when you choose Financefair, not only do we ground our decisions on real time accounting and banking data but we speak with you to understand your business needs and growth plans. We ensure we offer you the financial products that will be the best fit to your business. 

For example, we know from years of experience that e-commerce businesses find that RBF is a much more effective and efficient way to scale that business than with a short term business loan.

Some other important aspects to know about our products:

• A variety of flexible products means it’s easier to find something that’s a good fit for you. We’ll work with you and your finances to understand whether a line of credit, revenue based financing or invoice finance would be best for you.
• We offer flexible funding limits: This means that as your business grows, so can your funding limits. We also know that working capital ebbs and flows, so if you have a month where you haven’t taken in as much revenue as you expected, we can have a conversation about dialling back your funding – rather than stopping it altogether. 
• There are no restrictive debtor concentration limits: This is important for your business if you’re uncertain about how you’ll grow. We dive into more detail on this below.
• You don’t have to have debtors to work with us: Businesses with a subscription or recurring revenue model can sometimes struggle to find funding, but our RBF product means we can still help you
• We don’t require a personal guarantee from the business owner.
• Our pricing is transparent, with no hidden fees or costs.

Access more working capital via our unique funding model

We’re able to advance a larger amount of funds thanks to our established funding model. 

The funding doesn’t come from our own balance sheet, unlike with traditional banks. Instead, we partner with investors who advance the funding. This means you’ll have access to funding that has different risk mandates and a portfolio approach that can be taken to spread risk. This allows you to access more overall funding.

With traditional bank loans, there are strict concentration and risk rules. Banks don’t want to provide more financing to a company that already has a credit line with them. This means it’s often harder to top up or get access to a higher amount of funding.

Our established funding model means that for you as an SME you can more easily request – and get access to – more funding.

How Zeus Scooters used revenue based financing to expand into new territories

Irish company Zeus uses the world’s first 3-wheeled electric scooter featuring state-of-the-art technology and reliability to give their users a safe, smooth, and stable ride. Over 100,000 customers per day use their services through their mobile app, which operates across almost 40 cities in 6 countries and 2 continents, including Germany, Sweden, Norway, Croatia, Italy, and Malaysia.

For Zeus, the company’s speed of growth depended on how quickly they could secure funding for upfront infrastructural costs and more vehicles as adoption numbers rose in a new market.

The options were: 

1. Raise restrictive or expensive equity and potentially give up ownership of a portion of their business.
2. Take out inflexible long-term debt.

Zeus needed to find a solution that matched their growth plans without restricting their cash flow runway, business operations, or having to give up equity. 

This is where revenue based financing was the ideal option, as it meant Zeus could leverage up to 20% of their future annual recurring revenue (ARR) to buy the scooters needed to expand into new territories.

Founder and CEO Damian Young said: “We operate in a relatively new, very fluid, and fast-changing category. It can be difficult for more traditional funders to see the opportunity and they can be reluctant to support new business models.”

Financefair worked with Zeus  to provide funding based on their annual recurring revenue. We structured a business financing solution where they were able to repay based on the cyclical nature of their business, which included moratoriums and repayments when it worked best for them.

“Their solution really did demonstrate a total understanding of our business and allowed us to utilize our most valuable current assets – our customers – via our future cash flows (ARR) to increase stock levels, expand into new territories, and really grow our business.”

Find out more in the full Zeus Scooters case study. 

Manage your cash flow more efficiently and grow faster with Financefair 

In this article, we’ve looked at some of the options for working capital loans, and why revenue based financing or line of credit might work better for your business depending on your working capital financing strategy. 

Whether you need a source of funding for growing and scaling your business or to cover a one-off business expense like a bulk order of stock, our working capital financing solutions could help support your business needs. 

If you value flexibility and transparency and you’ve struggled to find suitable funding before due to running a business that doesn’t have tangible assets, let’s talk about how we can help you. 

Reach out to us to get started.