Working capital financing refers to the activity of obtaining funds to boost the working capital available to a business. There are various sources to finance working capital that include trade credit, cash credit/bank overdraft, working capital loan, discounting of bills, bank guarantee, factoring, commercial paper, inter-corporate deposits, etc.
Whether your business is facing cash flow issues or not, having extra cash in reserves is always good to secure yourself during unexpected circumstances.
Working capital financing lets borrowers to fulfil their short-term or urgent cash flow shortfalls.
Types of working capital financing:
Line of credit:
A line of credit is a loan account that allows businesses or other entities to draw funds as and when they need them on an ongoing basis. It offers greater flexibility than term loans as borrower can draw on the line of credit as needed to cover their operating expenses.
Asset-based lending (ABL):
In this type of lending, businesses can avail loan against collateral, For e.g., inventories, machinery, equipment, and real estate. If the borrower defaults, the lender can sell the collateral to recover their losses. Asset-based lending can help firms optimise cash flow, manage seasonal swings, and fund development without a solid credit history or financial success.
Invoice financing is a form of short-term borrowing in which your business can borrow money against the amount due on invoices you have issued to your customers. The lender provides borrower with a percentage of the value of its outstanding invoices. The lender then collects payment directly from the customers. Invoice financing is an attractive option for companies that have long payment terms. It can help improve a company’s cash flow and provide it with the funds required to continue operations.
Benefits of Working Capital Financing
Ensures Smooth Operations:
Working capital financing helps to keep a business afloat by financing its payment gaps and fulfilling its working capital requirement.
Working capital loans allow you to raise money without diluting your company’s ownership. It enhances the ability to expand your business.
Improves the cash flow:
Cash becomes available to a business by providing quick access to cash. This is important for businesses that operates in long payment cycles. Working Capital Financing can act as a bridge between time they provide goods or services and the time they receive payment.
Cash flow is an essential aspect of any business, as it is the lifeblood that keeps the organization running. A positive cash flow is crucial for a company’s growth and expansion. By choosing the correct way / path of working capital finance it can help a business to stay cash positive and focus on the growth of business.