Working capital is an indication of the financial and performance status of your business. It plays an important role in maintaining the workflow and any shortage in the working capital can affect the daily operational activities inside the business. There are different methods to overcome the shortcomings in working capital and we are discussing them in this blog post.
Before going through different methods, let’s see what is working capital.
What is Working Capital?
Working capital is the fund you need for your daily operational activities. It is a measure of a company’s liquidity, operational efficiency and capability to achieve short term goals. Working capital is required to carry out day-to-day activities in the company. Therefore, it is necessary to have positive working capital for a sustainable business.
Traditional loans for business ask for collateral and other documentation that guarantee the repayment of the loan amount. These requirements become difficult for SME owners to satisfy. The lack of collateral, interest rates, and other factors prevent them from getting external funding for their SME’s.
However, working capital is necessary to grow your business, meet the urgent needs and handle the cash flow gaps to meet the requirements. In such cases, there are alternative to traditional working capital loans for your business.
What is Working Capital Loan?
Working capital can be referred to as the cash required for daily operational activities in the company. A working capital loan is therefore used for meeting these short term needs and not for buying a long term asset. These loans are repaid when the company is doing good sales and the revenue is at its highest.
Some businesses aim for a season where they have a maximum sales opportunity. Working capital is necessary for stocking the needed inventory and supplies ahead of time to meet the requirements in the peak season.
Taking an example of an SME with the sales depend on the seasons. In the winter season, the sales are high and in the other seasons, it is lesser. The business owner spends his working capital buying inventory for preparing for the upcoming winter season. A working capital loan can cover all the shortages of cash for this.
When the winter month comes, sales go up and business owner has enough supplies to meet the requirements. With the increase in revenue, they can repay the loan amount.
However, in the case of SMEs, getting traditional loan services becomes difficult. This is due to the requirement of collateral and other documents to guarantee the repayment of the loan amount. There are different methods to get a working capital loan.
Methods To Get Working Capital Loans
When it comes to working capital loans, there are different financial services you can take advantage of. The following are the preferred methods for working capital loans.
A term loan is approved for a fixed time duration with an interest rate. Term loans are generally categorized into short term, intermediate and long term loans depending on the duration of the repayment schedule. For the assurance of repayment, term loans usually demand collateral from the businesses/companies. This is most suited for businesses that have a long and good standing in their area of business.
A business credit line lends an amount for a fixed tenure for your business. You can withdraw any amount below the credit limit and repay with only interest on the withdrawn amount. A credit line is an excellent way to have an amount reserved for your business needs.
Receivable financing can be a solution to cover your cash flow gaps. Receivable financing is where you sell your accounts receivable to a third-party and receive immediate funds in return. This can help you have a steady cash flow and not worry about the shortage of working capital until your customer pays.
Growth Capital Financing
Growth Capital Financing is a financing service provided by financing companies for business needs. Your business is granted an upfront capital on the basis of your future sales. The monthly repayment is carried out depending on the revenue stream.
There are different ways to acquire working capital through different lending services. Not all of them suits all industries and businesses. The traditional bank loan services demand collateral to get funding and other unsecured funding options call for high turnover businesses.
Finaxar offers financing services to businesses of different sizes - from small to enterprise level companies. Depending on the nature of your business, you have three options to choose from Finaxar’s services to fund your working capital needs.
Finaxar Credit Line is designed for businesses that struggle to expand their business by providing a line of credit. You can also opt to finance your invoices using Finaxar invoice factoring service called Receivables Financing. Finaxar Growth Capital Financing lets you have an upfront amount based on your future sales.
You can contact us to discuss more on which one will best suit your requirements.