5 ways to improve working capital without a loan

Late payments could be costing your business more than you think. Recent research shows UK SMEs lose £22,000 each year chasing overdue invoices, while 50,000 businesses close their doors each year due to cash flow problems. If you’re struggling to keep money flowing through your business but can’t – or don't want to – take on more debt, you’re not alone.

But here’s the good news… you could improve your working capital without borrowing a penny!

In this article, we’ll share five proven methods that could help free up cash within 30-90 days, giving your business the valuable breathing room it needs to grow.

Key points:

• Working capital is the money you have available to pay for daily operations.

• You can improve working capital by speeding up customer payments, optimising inventory, negotiating supplier terms, cutting costs and tracking cash flow accurately.

• Funding Options can help when optimisation working capital isn’t enough, offering access to business finance up to £20 million

What is working capital?

Working capital is the money that keeps your business running day-to-day. It’s what you use to pay suppliers, wages and other expenses before your customers pay their invoices.

The formula to calculate it is: Current Assets - Current Liabilities = Working Capital

Positive working capital means you can pay your bills. Negative working capital means you’re probably struggling with cash flow problems. And contrary to what some business owners think, being profitable doesn’t guarantee good cash flow – you may have £50,000 in outstanding invoices, but if your customers take 60 days to pay and your supplier wants payment in 30 days, you’ve got a working capital problem.

For growing businesses, keeping working capital positive can become even more challenging. The faster you grow, the more working capital you typically need. It’s a frustrating paradox that can catch a seemingly successful company off guard.

What’s your working capital cycle?

Your working capital cycle (WCC) is another way of saying “the journey cash takes through your business.” It starts when you buy stock or materials, continues through the production and sale process, and finishes when your customers pay you.

UK businesses operate some of the shortest working capital cycles globally, averaging less than 50 days. But even efficient cycles can strain your cash flow if it’s not managed properly.

The key is identifying where your cycle gets stuck. Are customers paying late? Is inventory sitting on shelves too long? Are you paying suppliers too quickly? Each bottleneck represents an opportunity to free up cash.

The challenges of increasing working capital

Every quarter, over half of UK SMEs have to deal with late payments. That’s around 2.8 million businesses struggling with the same cash flow pressures you’re likely to be facing.

Smaller businesses typically receive late payments 1-2 weeks after they were due, while larger businesses wait an average of 15-30 days after the agreed due date. At the same time, 72% of SMEs report unpredictable supplier delivery times, forcing them to hold more costly inventory than they’d like.

But while you can’t control when other businesses pay you, you can control how your business responds to them. The most resilient companies are those that actively manage their working capital rather than simply hoping things improve.

How to improve working capital without a loan

The following methods can be effective when implemented in order. So consider starting with customer payments and cost reduction for quick results, then move on to inventory optimisation and supplier negotiations for longer-term benefits.

1. Speed up customer payments

This is one of the lowest hanging fruits when it comes to improving your working capital…

If there’s room to send invoices more quickly after completing work or delivering goods, do it! The sooner you send the invoice, the earlier the payment deadline will be.

Make sure it’s easy for customers to pay your invoices, too. Include multiple payment methods, and consider offering 2-3% discounts for early payments within 10 days.

And finally, consider sending payment reminders at 7, 14 and 30 days. Often, just reminding a customer that an invoice needs paying can be enough to spur them into action.

The UK government’s Fair Payment Code sets the gold standard at 95% of invoices paid within 30 days. If you’re a smaller business, reference these standards when discussing payment terms with larger companies.

2. Cut costs and improve efficiency

When it comes to freeing up working capital, you might start thinking about cutting costs. This can be a good strategy, so long as the savings help rather than hinder your operations – it’s not usually a great idea to negatively impact customer service or product quality for the sake of short-term savings.

You can start by auditing your subscriptions and recurring payments. Not only might you find you’re paying for services you’ve forgotten about, but you might be able to find cheaper alternatives. It’s particularly important to review your energy suppliers, insurance policies and other professional services, as these are where the biggest savings can often be made.

Consider your workspace costs, too. In 2024, UK businesses provided just 56 desks per 100 employees (down from 79 per 100 in 2022). So if you’re paying for office space you don’t make the most of, consider subletting or downsizing to free up cash flow.

3. Maintain optimal stock levels

Inventory often represents a company’s biggest investment of working capital. It’s also where you’ll find some of your biggest opportunities for improvement.

First, you’ll want to clear any ‘dead’ stock. So review your stock on a regular (e.g. weekly) basis and look for items that haven’t sold in over 90 days. Then create a plan to clear them, even if it’s at reduced margins – it’s better to make some money than none.

Another way to free up working capital is to optimise supplier lead times and minimum orders. Many suppliers will be willing to negotiate with you if it means securing a longer-term relationship.

Even small improvements, like reducing safety stock from four to three weeks, could free up valuable cash. 

4. Negotiate longer supplier payment terms

It may feel a little uncomfortable, but negotiating longer payment terms can be easier than you might think.

Suppliers prefer predictable payments over fast payments, and many will already have standard extended terms available. So why not ask?

Make sure you’re prepared before speaking with them. Highlight your payment consistency (a good track record will help here), order regularity and long-term partnership potential. And if you can, consider offering something in return, like a small increase in order volume or a longer-term commitment.

Start your negotiations with a small ask. For example, if you currently pay in 30 days, ask for 45 days – even an extra 15 days could make a big difference to your cash flow.

And remember, negotiating longer terms isn’t taking advantage of your suppliers. You’re creating a sustainable business relationship that works for everyone.

5. Track cash flow more accurately

You can’t manage what you don’t measure. So make sure you have a quarterly rolling cash flow forecast. Update it each week and track your actual performance against predictions so you can spot problems before they become crises.

Focus on three key metrics:

• Days sales outstanding (how long customers take to pay)

• Inventory turnover (how quickly you convert stock to sales)

• Your payment cycle to suppliers

Once tracking is set up, you can use that data to make better decisions. For example, if your forecast shows a cash shortfall in six weeks, you can take action now by chasing invoices, deferring non-essential purchases or negotiating early payment discounts.

By keeping tabs on your cash flow, you can prevent making panic decisions and stay firmly in control.

Find business finance with Funding Options by Tide

Whether you’re looking for a standard business loan, a short-term business loan, or something a little more specialist, like auction finance for property developers, we’re one of the leading names in business finance in the UK, having helped facilitate over £800 million in finance to more than 18,000 customers. 

Checking if you’re eligible is free, only takes a few minutes, and while a full application would impact your personal or business credit score, checking eligibility won’t. Just submit your details via the link below to find out if you could be eligible to borrow up to £20 million.

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FAQs

How quickly could I see results?

It varies depending on the improvement. For example, customer payment improvements can show results in 30-60 days, while inventory optimisation can take 60-90 days. And while changing your supplier payment terms can take over 90 days to implement, it can also provide big ongoing benefits.

Won’t demanding faster payments damage customer relationships?

On the contrary! Professional payment terms and follow-up can actually improve relationships by setting clear expectations. Most customers respect businesses that manage their finances properly.

What if my suppliers won’t extend payment terms?

While not every supplier will agree, many will consider reasonable requests. Try starting with your largest or longest-standing supplier, and remember that even 5-10 day improvements can have a meaningful impact.

How do I know which method to prioritise?

It will depend on your situation. If you have overdue invoices, consider starting with customer payments. Or if your margins are under pressure, you might want to focus on reducing costs. Many businesses can benefit from tackling these two areas at the same time before focusing on inventory and supplier terms.

What if I still need external funding after optimising working capital?

Improving your working capital can make your business more attractive to lenders and alternative finance providers. It also ensures you’ll make better use of any funding you do secure. So starting by optimising your working capital optimisation can be a benefit.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.