Working Capital Financing Options Available To a Business

Working Capital Financing Options Available To a Business

The ability of a venture to access cash to start and run the business is central to the success or failure of the entity. Notably, there are different sources from which one can obtain cash to start a business including savings, contributions from friends and family, angel investor groups and venture capitalists. Once the enterprise is up and running, it will require additional cash, in the form of working capital to sustain its operations and meet its short-term (12 months or less) financial obligations. With sufficient working capital, a business will be able to pay its suppliers and staff as well as, keep production going as a result.

Sufficient working capital is, thus, essential for the business to survive. However, a business may at times suffer a working capital shortage when cash payments going out are more than receipts expected. At moments like these, external sources of working capital are useful to keep the business running. Some of the common working capital sources used by most companies include:

Bank Loans

Banks offer a more traditional source of working capital by providing a business short term loans. These loans have short repayment periods too, ranging from one year to seven years. Borrowers can choose from commercial lenders, credit unions and even governments, through special funds, when seeking loans to fund their working capital. The loan was taken, however, will require collateral and is secured by the assets a company has.

Factoring

Factoring is frequently used by businesses that are uncomfortable using traditional lending methods. Instead of lending a business money, an invoice factoring company will instead buy a company’s invoices at a discount and then collect the full amount payable on the invoice themselves. Although it is more expensive compared to traditional lending platforms, it provides a solution to many businesses that with cash flow problems especially while starting up.

The invoice factoring costs depend on various factors that determine how big or small a discount factor your business will fetch. Customers with excellent credit rating allow the business better discounts as the credit company takes on fewer risks. Additionally, Invoices that take a longer time to be paid will also attract a higher factoring cost. If your business also has a good credit rating, it can be allowed a larger advance rate.

Lines of Credit

Businesses also have an option of opening lines of credit with banks and other lenders available in their area. Such facilities allow the business access to funds as and when they need to use it. Lines of credit work in a manner similar to credit cards. The business can pay up on its obligations and pay the debt afterward when it receives cash. Lines of credit are avail instant credit, but this convenience comes at a price as they are slightly more expensive than bank loans. They also need to be secured by the company’s assets.

With one or more of these sources, businesses can sustain their day to day business operations even when invoice payments to the business get delays. They will also be beneficial to start-ups as they are prone to cash flow difficulties. Using them efficiently will ensure the business continues to grow without suffering drawbacks.

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