Working capital has a direct impact on cash flow in a business. Since cash flow is the name of the game for all business owners, a good understanding of working capital is imperative to make any venture successful.
Working capital is one of the most difficult financial concepts to understand for the small-business owner, and the life blood of any business. By definition, working capital is the amount by which current assets exceed current liabilities. However, if you simply run this calculation each period to try to analyse working capital, you won’t accomplish much in figuring out what your working capital needs are and how to meet them.
Here are the 5 most common sources of short-term working capital financing:
Equity: If your business is in its first year of operation and has not yet become profitable, then you might have to rely on equity funds for short-term working capital needs. These funds might be injected from your own personal resources or from a family member, friend or third-party investor.
Trade Creditors: If you have a particularly good relationship established with your trade creditors, you might be able to solicit their help in providing short-term working capital. If you have paid on time in the past, a trade creditor may be willing to extend terms to enable you to meet a big order.
Invoice Factoring: Factoring is another resource for short-term working capital financing. Once you have filled an order, a factoring company buys your account receivable and then handles the collection. This type of financing is more expensive than conventional bank financing but is often used by new businesses. Enlisting a factoring facility such as Populous World can provide large businesses in the UK with the working capital they need to bridge the gap between creditors when they stumble upon cash flow shortfalls.
Purchase Order Funding: Purchase Order Funding helps large businesses fill funding gaps by assisting with the financing of the transaction up until the time an invoice is raised. It’s designed to help companies that resell goods at a mark-up and need funds to pay their suppliers, allowing you to fulfil large orders.
Friends and Family: Supportive friends and family could be a flexible and viable way to raise finance for your business that could be a loan or equity partner. The advantage is that they may offer loans without interest or security and a longer repayment plan.
>> Is your business in need of fast, short-term financing? Do you need to access cash faster than your customers pay you?