Has your business’s working capital ratio fallen short? Do you need financial backing to reinforce certain areas of operation? You’re not alone. Proper management of operating expenses is the top financial challenge for businesses, with 40% of companies struggling to make payments. Working capital financing may be the solution. Here is a quick look into what working capital financing is, along with some types.
Working capital is essential to keep a business up and running. It’s used to fund short term assets, provide liquidity, and keep day-to-day operations from breaking down. Without adequate access to it, an organization may resort to canceling equipment investments, reducing employee pay, or even downsizing.
Before their financial health dwindles or in the event of an emergency, businesses can turn to working capital financing. This form of bankrolling is used when existing liabilities outweigh existing assets. Circumstances such as these often call for a business to borrow; however, adding another long-term liability can be a burden that many owners are reluctant to bear. In fact, adverse debt such as this keeps 25% of companies from seeking funds.
The truth is that working capital financing could be the solution, since the money is typically received and paid back in a short span of time. It can also be used to finance accounts payable in instances where there are outstanding invoices to be paid. In this way, a burrower doesn’t have more debt than she or he can feasibly repay.
There are many options available for this type of financial backing. It can be in the form of an advance, credit, guarantee, or favorable terms from customers and vendors. Finding the best fit often depends on the business’s industry, stage of development, and the current assets on its balance sheet.
A common type of working capital financing is accounts receivable factoring. This involves the sale of accounts receivable to a third-party at a discount. The discount serves as a fee charged by the third-party buyer — or factor — for its service. The process works to accelerate the receipt of cash through advances paid by the factoring company. Also referred to as invoice factoring, this funding allows quick access to a business’s netted cash when waiting on unpaid customer invoices isn’t viable.
Another type is a working capital revolver. Also known as a working capital line of credit or revolving credit facility, this method involves a line of credit wherein the amount of borrowing is tied to the amount of accounts receivable and inventory on the company’s balance sheet. The term “revolver” comes into play because the funds can be borrowed, repaid, and then reborrowed repeatedly.
If financing is needed to help keep your businesses’ cash flow positive, these working capital financing methods may be the answer. For more information on working capital financing, please see the accompanying resource.
Infographic provided by Seacoast Business Funding – payroll funding services