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Nike was built on working capital innovation.
If you've read Shoe Dog (the memoir of Nike founder Phil Knight), you'll know that Nike's perma-cashflow crisis nearly killed the company throughout their first two decades.
Nike, then called Blue Ribbon Sports, was built on a single founding insight, written by Knight in his Stanford Business School thesis: Japanese running shoes could do to German brands (like Adidas and Puma) what Japanese cameras had done to German cameras. Match them on quality and destroy them on price…
Knight was right.
Once he had his hands on the shoes, he could sell them fast and turn them rapidly into cash. But the working capital cycle to get those shoes to Knight was brutal.
And someone had to pay for it…
The shoes were manufactured in Japan, shipped across the Pacific, then sold through Blue Ribbon's distribution network in the US. Knight was paying for the shoes at, or near, the point of manufacture, then waiting months before he collected cash from customers. Long lead times, with no supplier credit.
So any profit Knight made was reinvested back into more inventory. And he couldn't get them fast enough.
Phil… put some fucking shoes on
Today, a business like this would be awash with funding options to support that growth. But not in those days. Banks lent only against hard assets, up to a set percentage of their value, capped by a maximum gearing ratio.
Here were Knight's problems:
His business was asset-light. He had plenty of inventory on the balance sheet, but most of it was sitting on a boat halfway across the Pacific. Not much use as bank collateral.
There was no such thing as lending based on cashflow. Remember, the statement of cashflows only became mandatory under US GAAP in 1987. Cashflow just wasn’t really a thing.
There was no obvious source of equity either. This was long before any VC ecosystem existed for consumer product brands. Today, all you'd need is a sparse website, a sans-serif logo, the letters AI, and a founder video sincerely claiming they've been working their entire life to "reimagine the human-ground interface".
Knight, didn’t have many options, but he borrowed what he could from conventional American banks against the retained profits he'd built. While that was’t nothing, it wasn’t enough either. And it didn't take long to max out those lines. He couldn't afford to grow. And he couldn't afford not to grow…
Then everything changed when Knight read about how Japanese trading companies specialized in facilitating international trade problems like this.
Before long, he had an introduction to Nissho Iwai, Japan's sixth-largest trading company. Nissho offered Knight the working capital funding lifeline that changed the history of Nike.
They would fund the inventory, charging a finance fee on the drawn loan, plus take a 4% rev share on Nike shoe sales. Pretty creative and totally unheard of in the US in the early 1970s.
That relationship unlocked the working capital that allowed Nike to scale. When Nissho got involved in 1971, Nike’s sales were around $500,000. Nine years later, at IPO, they were over $250m.
Just Do It, indeed.
Fun fact: Nike's IPO was in the same week as Apple's. A big week for the guys at Morgan Stanley, Goldman Sachs et al. It’s so nice when the good guys win.
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Welcome to part 4 of this five week series: Working Capital Warfare
In week one, we established that working capital strategy and business strategy are inseparable, especially if you want to grow.
In week two, we broke down the cycles underpinning your working capital needs and how to use them to size what you actually require.
Last week, we went deep into the five working capital shapes and how to optimize inside each one.
This week, we get into how to fund your working capital cycle.
Let’s start with some basics on designing your capital structure.
Duration matching: Fast vs. slow capital
Every business has two types of capital needs:
Fast-cycling capital: The money that flows in and out with each operating cycle
Slow-cycling capital: The money locked into long-term assets, infrastructure, and structural requirements
Good capital structure design is about matching the duration between the funding and the capital need.
This is taught in every corporate finance course. And it is violated in almost every distressed balance sheet I have ever seen. I've seen a few…
Fund a long-term structural requirement with a short-term facility, and you end up in a slow-moving trap. You become gradually more dependent on short-term sources of funds. It feels flexible at first, until you realize the lender holds more and more of the cards. The purest example is using an overdraft to fund underlying losses. It rarely ends well…
The other direction is just as dangerous, if less dramatic. Fund volatile working capital needs with long-term capital, and you end up carrying deadweight on the balance sheet. But the real cost isn't the stranded interest; it's the complacency and poor behaviors that develop when a business has an easy out. Why let unit economics get in the way of growth if capital is abundant? Why sweat the cash conversion when there's always more runway?
This became endemic during the ZIRP era. Near-zero base rates and a flat yield curve meant there was very little trade-off between the duration of funding and its cost. Duration matching didn’t really matter because there was little penalty for getting it wrong.
There were many such cases in the 2010s…
Take Casper, the direct-to-consumer mattress business that convinced venture capital it was, in fact, a tech play by using some creative LTV math and the stated mission to "awaken the potential of a well-rested world." No, I didn't make that up:
Title slide from a 2021 Casper investor deck.
All of this conveniently overlooked the fact that most people buy a mattress once every ten years. Which means the Life Time Value was, well, the contribution margin earned on a single mattress sale. It was the abundance of cheap, long-duration capital that convinced Casper that their job was nothing more complex than selling mattresses at a margin and funding the working-capital needs behind that.
They ended up being sold to private equity for $300m. Which doesn't sound bad until you hear they raised $350m to get there.
That brings us back to Nike.
What was so elegant about the Nissho Iwai relationship was that it perfectly matched the duration of the funding to the working capital cycle. Yes, the capital was expensive, but also perfectly efficient, and crucially it solved an otherwise unsolvable growth constraint for Nike.
The fine line between working capital and the capital structure
So, does that mean all working capital should be funded with fast-cycling capital?
No.
Even within a cycling working capital need, there is often a structural floor. A base level that recurs consistently regardless of where you are in the cycle.
In a positive working-capital business, there will typically be a persistent floor that can be funded as part of the broader long-term capital structure. Funding that floor long frees up short-term capacity to absorb volatility and support growth. Set that floor too low, and you'll always feel the pinch at peak seasonality:
The lower the volatility in your working capital, the higher you can set that floor. This is yet another reason to invest in reducing working capital volatility.
Now flip it. In a negative working capital business, as long as you have confidence that the negative position has a durable baseline can becomes part of your permanent capital structure. It actively reduces your long-term funding needs, less equity dilution, lower interest costs. You see this most acutely in float businesses like insurance, where the float is real, usable capital that is fundamental to how the entire balance sheet is structured:
You can see that the structural capital requirement can be set much lower using the benefit of durable negative working capital. While still layering a facility to absorb the ebbs and flows of working capital shifts on top.
Last week’s example of Costco using negative working capital to help fund growth CapEx is a practical example of this.
Understanding the true split between your long-term and short-term capital needs is key to good capital stewardship.
If you want to go deeper on where and how to set that line, I ran a full series on capital structure design last year.
For now, we'll focus on 8 different flavors of financing for funding working capital and when to use them:
Internal levers
Regular bank facilities
Receivables finance
Inventory finance
Supply chain finance
Trade finance
Platform/marketplace lending
Hybrid/structural solutions
Internal levers
(Cash pooling, payment term optimization, inventory rationalization, billing acceleration, supply chain redesign, customer deposits)
Typical cost: Free in finance terms. The cost is commercial and operational, not financial.
Flexibility: High
Security required: None
Disclosability: N/A
Types of lender: N/A
Suitable for: every business, every working capital shape. Always start here.
Benefits: No external cost, no lender relationship required, and improvements are structural. Every dollar unlocked here is a dollar you don't need to borrow.
Watch outs: Easy to deprioritize when external funding feels easier. Requires organizational will, not just financial engineering.
Bank facilities
(Overdraft, revolving credit facility, working capital term loan, seasonal facilities, multi-currency lines)
Typical cost: Base rate plus 1.5-3.5% for revolving facilities and term loans. Overdraft margins are higher at the base rate plus 2-4%, plus arrangement and non-utilization fees.
Flexibility: High on revolving facilities, lower on term
Security required: Typically, a debenture or specific asset charge
Disclosability: Invisible to commercial partners
Types of lender: Clearing banks, relationship banks, regional banks
Suitable for: Positive and project working capital businesses. The revolving credit facility is the workhorse for most mid-market businesses.
Benefits: Well understood by lenders, straightforward to structure, and scales with the business. A strong banking relationship provides flexibility in a crisis that no other instrument can replicate.
Watch outs: Overdrafts are often repayable on demand. Never use it to fund a structural need or cover losses. You might be one relationship manager change away from the rug being pulled on your whole business.
Receivables finance
(Invoice discounting, factoring, selective invoice finance, export receivables finance, receivables securitization)
Typical cost: Base rate plus 1.5-3% on drawn balance, plus a service charge (either fixed fee or 0.2-1% of turnover). Selective invoice finance typically 1.5-3% of invoice value for 30-90 days.
Flexibility: High. Facility tracks the ledger, so it scales up and down with business activity.
Security required: Assignment of receivables
Disclosability: Increasingly arranged in a way that is invisible to customers. Traditional factoring is oftentimes visible to customers (as the lender chases directly) but it’s becoming less common
Types of lender: Specialist receivables finance houses, bank-owned invoice finance arms, fintech lenders
Suitable for: Positive working capital businesses with a strong debtor book. Particularly effective for fast-growing businesses where the ledger is expanding ahead of bank facility headroom.
Benefits: Converts the debtor book into immediate cash without changing commercial terms. Grows organically with revenue.
Watch outs: Ledger quality drives availability. A falling sales line tightens the facility at exactly the wrong moment. Customer concentration clauses can unexpectedly cap availability. Can lead to complacency in debt collection practices.
Inventory finance
(Stock finance, warehouse receipt finance, commodity finance, floor plan finance, purchase order finance)
Typical cost: Base rate plus 3-6% on drawn balance. Purchase order finance at the expensive end, often 2-4% per month.
Flexibility: Moderate. Tied to stock quality and valuation
Security required: Charge over inventory, sometimes with third-party control
Disclosability: Warehouse arrangements may be visible to suppliers
Types of lender: Asset-based lenders, commodity finance banks, specialist inventory lenders
Suitable for: Inventory-heavy positive working capital businesses. Seasonal build cycles. Commodity businesses with liquid, easily valued stock.
Benefits: Unlocks capital sitting inert on the balance sheet. Does a good job of matching cash outlay for stock builds (like the Nike example).
Watch outs: Lenders only fund what they can sell. Slow-moving or hard-to-value stock gets excluded. Doesn’t work well with perishables.
Supply chain finance
(Reverse factoring, dynamic discounting, supplier term extension)
Cost: Reverse factoring is typically base rate plus 0.5-1.5%. True cost is hidden in supplier pricing and relationship fragility.
Flexibility: Moderate
Security required: Typically none. Based on buyer creditworthiness.
Disclosability: Visible to suppliers. Increasingly becoming an area of audit and investor scrutiny.
Types of lender: Large banks, specialist SCF providers, fintech platforms
Suitable For: Businesses that buy from larger suppliers with strong balance sheets
Benefits: Suppliers have access to early payment at the buyer's lower cost of capital. Can strengthen supply chain resilience when used correctly.
Watch outs: One of the most addictive instrument on this list. Gives businesses the sugar high of a negative working capital cycle, without actually having one, bad for behavior. Availability driven by the strength of the supplier's balance sheets.
Trade finance
(Letters of credit, documentary collections, trade credit insurance, banker's acceptance, Sogo Shosha model)
Cost: Letters of credit 0.5-2% of transaction value. Trade credit insurance typically 0.1-0.5% of insured turnover.
Flexibility: Low to moderate. Transaction-specific by design.
Security required: Underlying goods or receivables. Or a bank guarantee.
Disclosability: Disclosed to counterparties by design
Types of lender: Trade finance banks, export credit agencies, specialist boutiques
Suitable for: Businesses with significant cross-border trade exposure
Benefits: Removes counterparty risk from international transactions
Watch outs: Operationally intensive. Letters of credit require precise documentation. Not appropriate for domestic trade. Banks increasingly want a full bank guarantee as security, which can defeat the point of the funding. Trade credit insurance is fragile and conservative (I’ll save a rant on credit insurance for another day).
Platform and marketplace lending
(Merchant cash advances, revenue-based finance, ad platform financing, B2B BNPL, Amazon Lending, Shopify Capital)
Cost: 20-50% annualized for merchant cash advances and revenue-based finance. Ad platform and marketplace lending 15-30% annualized. Rarely presented transparently.
Flexibility: Very high. Frictionless by design.
Security required: Future revenue streams
Disclosability: Disclosed to platform only. Otherwise invisible.
Types of lender: A wide range of platforms and providers, some of dubious origin.
Suitable for: Short-duration, high-confidence working capital spikes with a clear repayment path. Often used in ecommerce.
Benefits: Speed and accessibility. Bridges a genuine gap faster than any other instrument.
Watch outs: Desperate money. Very expensive, only suitable for funding short term volatility points. Often used more structurally, which creates a high risk of death spiral.
Structural/Hybrid solutions
(Asset-based lending, sale and leaseback, securitization, working capital tranche within broader facility, mezzanine)
Cost: Asset-based lending base rate plus 2-4%. Sale and leaseback 5-9% implicit rate. Securitization base rate plus 0.5-1.5%. Mezzanine 10-15% or higher.
Flexibility: Low to moderate. Complex to establish and unwind.
Security required: Whole balance sheet or specific asset pools.
Disclosability: Fully disclosed. Detailed reporting covenants required.
Types of lender: Investment banks, private credit funds, asset-based lenders, mezzanine providers
Suitable for: Businesses where the structural floor is large enough and persistent enough to warrant long-term capital. Sophisticated finance teams.
Benefits: Matches permanent capital to a permanent need. Maximizes borrowing capacity across the whole balance sheet.
Watch outs: Requires real treasury sophistication, not for feint heared. You are dealing with serious operators who would happily take your assets.
The working capital finance trap
It's no exaggeration to say that the way a CFO structures their working capital cycle is often a life-or-death decision for the business.
By definition, it's fast money needed in a hurry. When it's planned, thoughtful, and built inside well-understood guardrails, it's magic. When it's reactive, you end up chasing the most available money rather than the right money. Then you are hooked on ‘crack debt’…
And once you're there, it masks the real issues, trains bad behaviors into the business, and puts you in a reactive tailspin. Best case, the business is working its ass off just to make lenders rich. Worst case, you won't be able to pull the nose up in time.
Last year, I told the story of UK construction giant Carillion. It was one of those ‘surprise’ failures (at least to those watching from the outside) with far-reaching consequences. But when you looked under the hood, it was a straightforward story of poor capital duration matching that hid the real issues and led to major performance malaise.
And then one day the road just ran out…
Almost every story you'll ever read about lender fraud happens in working capital finance, too. The recent First Brands collapse is the latest example: double pledging, manufactured invoices, that kind of shit. Don't forget, those losses and the insurance against them are baked into the margin you pay as an honest camper.
Anyway… let’s help you make this tactical for your business:
Net net
Working capital funding is not a treasury admin task. It is one of the most consequential decisions a CFO makes and one of the most commonly botched.
Get the structure right, and it is an engine. Get it wrong, and it becomes the thing that kills you.
Next week, we get into the tactical arsenal: the receivables, payables, and inventory playbooks, and the governance layer that makes it all stick.
The final piece of the puzzle…
Note: Some of you have asked for a refresher on how working capital works in M&A. I’m not going to get there in this series; I’ve got too much to say. The good news is that I covered it in great detail here last year.
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Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need.
