Working Capital Finance
Working Capital Financing is defined as raising money for running day to day operations and payrolls by business.
It is not to be confused with Asset Finance or Equipment Finance. Businesses use working capital in various ways to expand and scale up the existing lines of business. Traditionally working capital is defined as Short Term Assets (Assets with maturity less than 1 year) – Short term Liabilities (Liabilities less than 1year).
Short term assets include cash, cash like securities, inventory, accounts receivable from clients. Short term liabilities include account payable, payrolls, debt maturing within a year etc. The idea is how much money is available for business to fund its operations.
Working Capital Loans help businesses to invest in their growth.
A lot of businesses prefer to have extra cash in hand to secure themselves during an unexpected circumstance. A strong balance sheet of a business can support its growth and indicate its good financial health to lenders. The decision to use working capital loan shall always be weighed upon different parameters (like maturity ( short term and long term), use of proceeds(buying an asset or for immediate payments), and compared against line of credit and term loans.
Working Capital Loan can be used for specific growth projects.
This can be like taking on a bigger contract or investing in a new market (new showroom, expanding in new geography, or a new product line). For example, Company A has been running a restaurant business for 4 years and has 3 restaurants in Auckland and they are looking to open a new restaurant in Hamilton. The working capital finance can help them to initially pay for the set-up cost which they can repay.
A company can utilize a working capital to bridge the gap between cash outflow and inflow.
A company can utilize a working capital to cater to seasonality and business cyclicality.
For example, a Wine Making Company W needs working capital to pay for payrolls and other expenses during the grape harvesting season (March to May in New Zealand) and will receive the payments when they sell their wine (say October-November). The working capital loan can easily cover their operations till they receive the cash proceeds from the sale.
Benefits & Drawbacks of Working Capital Loan
Bridge Expenditure Gaps
Working Capital Financing helps a business to manage its mismatched cash flows (time difference between inflows and outflows). Small and growing businesses most often rely on accounts payable to fund their day-to-day business operations (rental, other invoices etc) without equity infusion (from shareholders/Directors). Working Capital Loans can bridge this gap without need for an infusion of equity by shareholders.
Most of the working loans require zero collateral depending on the credit rating of the business/company. A company with a good credit rating can use this facility to support their transactions in shorter terms.
Seasonal and Cyclical Industries
An industry which sees a lot of activity during a period in a year but then slows down during the rest of the year can benefit immensely from a short term of financing like Working Capital Financing.
Working capital cannot be relied on when a business doesn’t have cash flows to service the loan. As most of these loans have shorter maturity, it would not be fit for buying an asset or use the proceeds to invest.
High Credit Rating
Working capital loans are available and cheaper for a business with a high credit rating. It might not suit a business which is starting its operations or doesn’t have a high credit rating.
We at Loan Square would help you to understand your financing needs and would provide with best financing solutions.
Loan Square offers working capital solutions to help businesses maintain a steady cash flow for sustainable business growth. Whether you are an eCommerce, import & export, retail, or supply chain business, we help a wide range of industries meet their working capital financing needs.