The short answer
Working capital finance is short-term funding that covers the gap between paying for stock, wages and suppliers and getting paid by customers. It keeps a profitable business liquid while cash is tied up in stock or unpaid invoices. Common forms include working capital loans, lines of credit, overdrafts, invoice finance and trade finance.
What is working capital?
Working capital is the cash a business has available to run day to day. Accountants define it as current assets (cash, stock, money owed to you) minus current liabilities (bills, tax and short-term debts due within a year). A positive number means, in theory, you can cover what you owe.
In practice, the formula hides the real problem. A business can have healthy working capital on the balance sheet and still be unable to pay wages on Friday, because the “assets” are pallets of stock in a warehouse and invoices that customers will not pay for another six weeks. What matters day to day is cash, and when it turns up.
What is working capital finance?
Working capital finance is short-term funding that bridges the time between money going out and money coming in. You use it to buy stock, pay staff and cover suppliers while you wait for sales and customer payments to land. As that cash arrives, the finance is repaid.
The key idea is timing. Working capital finance is not for buying a building or a new excavator. It is for keeping a profitable business liquid while its cash is tied up in the normal cycle of trading.
How does the working capital cycle work?
Every business has a cash cycle. The length of that cycle decides how much working capital you need. There are three moving parts:
- Stock days: how long stock or materials sit before they are sold or used
- Debtor days: how long customers take to pay after you invoice
- Creditor days: how long your suppliers give you to pay
Your cash gap is stock days plus debtor days, minus creditor days.
Take an illustrative Auckland homeware importer. It pays its overseas supplier before goods are shipped. Containers take around six weeks to arrive, stock then sits about two months before it sells to retailers, and those retailers pay on the 20th of the month following. Add it up and the business can be well over three months out of pocket on every order, before a single dollar comes back.
Now the importer wins a big new retail account. Sales double, which is great news, but so does the cash tied up in the cycle. This is why fast-growing businesses so often run short of cash: growth eats working capital.
How much working capital finance does your business need?
A simple way to size it:
- Work out your cash gap in days using the formula above.
- Work out your average daily operating costs: wages, stock purchases, rent, overheads and tax, divided by the days in the period.
- Multiply the two.
- Add a buffer for slow months, late payers and tax dates.
If your gap is 60 days and the business spends around $3,000 a day to operate, you have roughly $180,000 tied up in the cycle at any time. You will not need to finance all of it, because some comes from your own cash and supplier terms, but it shows the scale of the problem. Our cash flow gap calculator does the maths for you.
Do not forget tax. GST at 15% is collected on your sales, but it belongs to Inland Revenue, and provisional tax instalments land on fixed dates whether or not customers have paid you.
What types of working capital finance are there in NZ?
There is no single best product. The right one depends on whether your gap is constant, seasonal or tied to specific invoices or orders.
| Option | How it works | Best for | Watch out for |
|---|---|---|---|
| Working capital loan | Lump sum, fixed repayments over a short term | A known, specific need such as a stock build | Repayments start before the cash comes back |
| Line of credit | Draw, repay and redraw up to a limit | Ongoing, uneven swings | Discipline needed to pay it back down |
| Bank overdraft | Revolving limit on your transaction account | Small day-to-day dips | Limits can be reviewed or pulled |
| Invoice finance | Advance against unpaid invoices | B2B businesses with slow payers | Only covers invoiced sales |
| Trade finance | Pays overseas or local suppliers for you | Importers and stock-heavy businesses | Tied to specific purchases |
| 1st or 2nd mortgage | Property-secured funding | Larger needs or patchy records | Needs equity in property |
LoansOne arranges unsecured business loans from $20,000 to $500,000 and 1st or 2nd mortgages for business purposes in the same range. The mortgage options need no cash flow or financial records, which helps when your accounts are running behind.
How is working capital finance priced?
There is no standard price for working capital finance, because every lender reads risk differently. The main drivers are how long you have been trading, how steady your turnover is, your credit history, your tax position, the term, the amount and whether property or other security sits behind the facility. Revolving facilities such as lines of credit can also carry costs for keeping the limit available, even when you are not drawing on it.
Every loan arranged through LoansOne is priced on the client’s individual circumstances, and the team works to get the sharpest rate available for your situation. When you compare offers, look at the total cost over the time you will actually use the money, not just the headline figure.
Should working capital be funded short-term or long-term?
Match the term to the purpose. Money tied up in stock that sells within months should be funded with something that repays within months. Stretching a working capital need over many years means you are still paying for last year’s stock long after it is sold.
The exception is a permanent increase in working capital, for example when a business has grown to a new, larger size for good. Some of that “core” working capital can sensibly sit on a longer facility. Our guide to short-term vs long-term business loans covers how to choose.
What are the signs you need working capital finance?
- You are turning down orders or contracts because you cannot fund the materials upfront.
- Suppliers are offering early-payment or bulk discounts you cannot take.
- Your busy season needs stock or staff before the revenue arrives.
- GST or PAYE payments are starting to slip.
- One large customer paying late puts the whole month under pressure.
- You are paying suppliers with your personal credit card.
If your business has big swings through the year, our guide to seasonal cash flow in NZ shows how to plan around them.
Example: a Hamilton engineering firm wins a bigger contract
Picture a 12-person steel fabrication business in Hamilton. It has traded profitably for years on a mix of local jobs, most paid on the 20th of the month following. Then it wins a contract to supply structural steel for a large commercial build.
The job is great for the business, but the timing is brutal. Steel has to be bought and paid for upfront, the workshop needs two extra fabricators, and the head contractor pays monthly progress claims about seven weeks after work starts. On paper the business is more profitable than ever. In the bank account, the wage run is looking tight within a month.
A working capital loan sized to cover the steel and the first two months of extra wages solves it. Repayments are set to start once progress claims begin landing, and the loan is cleared well before the contract finishes. The owner keeps the business’s existing overdraft free for normal day-to-day swings. This is an illustrative scenario, but it is one of the most common reasons Kiwi SMEs look for working capital finance: not because something has gone wrong, but because something has gone right.
Can you free up working capital without borrowing?
Often, at least partly. Before borrowing, look at:
- Invoicing faster: send invoices the day the job finishes, not at month end.
- Tightening terms: ask for deposits on big jobs and progress payments on long ones.
- Reducing slow stock: clear lines that have not moved in months.
- Negotiating supplier terms: a reliable payer can often get longer terms.
These measures shrink the gap. Finance then covers what is left, so you borrow less and for less time.
What do lenders look for in a working capital application?
Lenders want to see that the gap is temporary and the repayment source is real. Expect questions about your turnover trend, how long customers take to pay, your tax position and what the money will be used for. A one-line purpose such as “fund stock for the summer season, repaid from December and January sales” goes a long way.
Next step
Working capital finance keeps good businesses from being starved of cash by their own success. If you know the size of your gap, apply in about 30 seconds to see if you qualify. It is free, it does not mark your credit file, and an expert matches you to the right lender rather than shopping your details around. Or call 09-888 5252 to talk it through.
