Working capital is the most crucial aspect of financing because the term does not only mean financing but a lot of different people with plenty of things. Businesses often find it difficult when it comes to analyzing the working capital. In order to obtain perfect working capital, you need to thoroughly determine the business’s operating cycle. Accounts payable, inventory and accounts receivables give your overall insight of the financing. Working capital is often a short-term financing need. The need for working capital arises when you do not execute the operating cycle properly. This shortfall would eventually affect the internal and external operations of the business. Below is a depiction of working capitals along with its determinants:
You don’t need to put your business on risk, rather you may follow these best practical tips in order to obtain working capital financing.
Table of Contents
Working Capital
1. Equity
If you have short-term working capital need, then you should rely on the equity funds. Such a situation arises when you are new in the market and getting profit is really a hard task to achieve. Third-party visitor, friends or family members or own personal resources would be the best way to inject these funds. Moreover, if you are an existing business then you might need to sell some of the ownership shares of the business. This can also be involving someone who can take critical decisions. Nevertheless, it would be beneficial for your company as well because it would act as the future winder of your business. But obtain working capital on a short-term basis which you can repay within 12 months.
2. Trade Creditors
Trade creditor is a good choice when obtaining working capital. Take advantage of good relations and make most of the working capitals loans. Trade creditors are often willing to expand the contracts if you have paid on time. This would work as an interest-free loan when you have to incur accounting cost or additional admin costs.
3. Factoring
Factoring is one of the strongest methods of getting working capital. It is debtor finance and financial transaction which is sold by the business at a viable discount. When business is in need of immediate cash, you need to factor the receivables in order to utilize the factoring method. Don’t get confused with the accounts receivable financing, invoice factoring or account receivable factoring terms: all belong to the same category. The leading factoring and asset-based lending association are “Commercial Finance Association”. It is applied when you have fulfilled the order where factoring companies had bought your account receivable where the collection is handled by the company. However, this tip might be expensive for your business but it can be worth if you have started a new business.
4. Line of Credit
Line of credit from banks would be a great option to obtain the working capital. You need to maintain good collateral and well-capitalized equity of the business. Line of credit can be entitled when minor needs arise and you can easily borrow funds on a short-term basis. These funds might last for the year or longer. This option is the best for getting the working capital as desired because it works as the credit card for your business. Having a line of credit would allow you to spend as much as you need for the business. Moreover, it is an extension of the short-term loans. With interest on top, over the set amount of time, you will need to repay the amount. It would act as a boosting jumpstart in the working capital’s cash flow. Line of rent would cover emergency repairs, capital source of backup working, utilities, payroll, covering rent and more.
5. Merchant Cash Advance Financing
You are eligible for merchant advance financing when you have made enormous credit card sales. You don’t need any collateral; you can make advance sales with this financing option. Moreover, there is quick add-up in the merchant cash advance fees. However, there are certain criteria you need to follow; creditor would take a certain fixed amount from your daily sales on credit cards. Adopt this option when you have a great bottom line because this might prove as a little expensive options. Technically, it is not a type of loan but an advance. Lenders might take the bottom line of 1.1 to 1.5 factors.
6. Short-Term Loan
Sometimes, it is difficult to qualify for the line of credit. Short-term loan works here best in order to accomplish all the working capital needs. With the ample good relations, bankers might be agreeing to provide the seasonal loans well so that you can build up better account receivable or inventory. You can calculate the short-term loans in different ways. Choose the one that is comfortable and the most affordable. Go through the major interest rates in order to have enough knowledge to negotiate with the bank officers accordingly.
Last Words
Your financial situation, your timeline and your business needs would best decide which option will be working for you in a broader spectrum. You need to take care of the operating cycle and maintain good collateral and well-capitalized equity of the business. Having a line of credit would allow you to spend as much as you need for the business. However, the right choice is often trying different financing options and choosing the one which actually works.
