Working capital finance

Working capital is the money your business has available to run its daily operations.

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What is working capital finance?

Working capital finance is designed to increase the cash available to a business. This cash can be used for everyday operations, as well as to grow your business in the short-term.

There are a variety of different forms of lending, that can be thought of as working capital finance.

Working capital — considerations

The amount of working capital a company has, can be considered as its current assets minus current liabilities.

When working capital dries up, your business can struggle to pay staff or suppliers. A working capital loan can provide you with a quick injection of much needed funds — allowing you to stay operational.

Working capital loans can cover everyday expenses such as payroll, accounts payable etc. They are simple shot-term loans — that work in similar ways to overdrafts.

How does working capital finance work?

As a business struggling with cash flow problems, you may approach a lender for working capital finance. This working capital finance can be provided in the form of secured or unsecured loans.

Alternatively you may have cash tied up in unpaid invoices — thus invoice finance may be more appropriate. Asset refinance is also popular, allowing you to secure a loan — based on cash tied up in any commercial assets you have. Overdrafts and revolving credit facilities are also both useful sources of working capital finance.

Types of working capital finance

Cash flow loans are usually short-term loans, with the purpose of boosting the money available to a business — for managing expenses and company growth. Cash flow loans are commonly unsecured — with borrowing backed by expected future revenues.

A business overdraft gives you flexible access to cash as and when needed. Normally, You only pay interest on the amount borrowed. Overdrafts allows you to access cash really quickly. However, they have low draw-down limits and are not really suitable for purchasing assets or making long term investments.

Like overdrafts, revolving credit facilities give you a pre-approved source of funds — to be used when required. The difference is that with a revolving credit facility — you don’t need a specific bank account with that lender (and you can usually borrow more money).

Businesses that trade by invoicing their customers for services or products sold, may consider invoice finance — as a means of working capital. With invoice financing, your invoices are essentially sold to a lender at a discounted rate — allowing you to access that cash there and then.

Businesses that have valuable assets can borrow against them — asset refinance. This is a form of secured business loan, as the underlying asset acts as collateral. The greater the value of the asset, the more cash that can be loaned out to you.

Stock finance is a lending facility that releases working capital — from stock such as finished goods or raw materials.

Trade finance can give you the money required, to buy inventory or stock from a supplier. This typically involves importing products — from suppliers based overseas.

Forfaiting is a means of financing, that allows exporters to receive money instantly, by selling their receivables to a forfaiter (intermediary) — at a discount.

Supply chain financing is a set of business financing processes, based on tech, that helps optimize cash flow between a buyer and supplier.

Purchase order finance is a funding facility, that can be used to pay your domestic/local suppliers. This funding is secured on the back of a purchase order (PO).

Trade credit is the credit extended to buyers, by suppliers, letting them buy now and pay later.

Contract financing is a means for a business to get a cash advance, on work yet to be completed. It is collateralized by the contract between a business and a customer.

Benefits of working capital finance

  • Can be easy to access — especially for businesses with trading history
  • Better business flexibility
  • Maintains cash flow
  • Can be used to — satisfy customer orders, expand your business, and invest in new products and services.
  • Can provide you with a line of credit facility — for unexpected needs

Limitations of working capital finance

  • Too much can indicate your business is not taking opportunities to grow and develop or is simply not aware of them
  • You may require collateral
  • Depending on the facility — interest rates can be high
  • As some facilities are easy to access — borrowed money may be mismanaged

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