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What is Working Capital Finance?
Working capital refers to the funds used by your business to cover its short-term operational needs, such as paying employee wages, buying stock, and covering rent or outstanding invoices.
It is called ‘working capital’ because the money is available to use immediately, and it isn’t tied up long-term in other parts of the company.
Working capital finance is a way to borrow money to boost the amount of working capital you have to work with.
It is a crucial aspect of financial management, as it makes sure your company can manage its everyday finances without any cash flow problems.
KEY POINT: Working capital finance helps with the day-to-day operations of your business.
Why Do I Need to Consider Working Capital Finance?
By understanding the concept of working capital finance and exploring various financing options, you can make more informed decisions about your business that will help you better manage your own working capital needs.
Your business has its own unique set of circumstances and goals, so choosing the right option is an important step, whether it’s through short-term loans, lines of credit, or other financing alternatives.
With proper working capital management and finance, you’ll be able to improve the financial stability of your company and cope with economic uncertainties more confidently.
KEY POINT: If your business is seasonal, working capital finance can help bridge the gap in income during quieter periods.
What are the Main Sources of Working Capital Finance?
There is a wide range of financial sources available to businesses to help keep operations running smoothly. Some common options include:
- Short-term loans: These loans are typically provided by banks or other financial institutions to meet your company’s immediate cash needs. They offer flexibility in terms of repayment periods and interest rates.
- Credit: A line of credit provides your business with a pre-approved credit limit that you can use as needed. Interest is only charged on the amount you actually use, making it a flexible option.
- Trade credit: Suppliers may offer favourable payment terms and allow you to make payments at a later date or over a set period of time. This can give an instant, but short-term boost to your working capital.
- Inventory financing: This option allows your business to secure a loan by using your inventory as collateral. This option is particularly helpful for companies with a large amount of stock.
- Crowdfunding: In recent years, crowdfunding platforms have become more popular as an alternative source of working capital finance, particularly for startups and small businesses. It involves raising funds from a large number of individuals in exchange for equity or rewards.
- Equity financing: Another way you may choose to raise funds by selling shares in your company. This can significantly increase your amount of working capital, but it dilutes ownership and may involve complex legal processes.
- Government programmes: Various government programmes and grants are available to support businesses with their working capital needs, particularly during challenging economic conditions or for certain sectors.
How Do I Choose the Right Working Capital Finance Option?
There are many factors to think about when choosing the best working capital finance option for your business – its size, cash flow patterns, and growth prospects are just some of them.
Here are a few tips to help you get started:
- Understand what you need: Work out the specific cash flow requirements of your business, including regular expenses, accounts that need to be paid, and periods where revenue may be lower or higher.
- Understand the costs and risks: Find out the costs associated with each financing option, such as interest rates, fees, and potential risks. Compare these costs with the potential benefits to work out the most suitable option for your business.
- Review the terms and conditions: Carefully review the terms and conditions of the agreement, including repayment terms, collateral requirements, and any restrictions.
- Ask the experts: Discuss your options with financial advisors or professionals who specialise in working capital finance. They can give you valuable insights and help you to choose the most suitable option for your business.
KEY POINT: It’s worth remembering that working capital loans and other financing options can be linked to a business owner’s personal credit, so any late or missed payments can damage your credit score.
What are the Pros and Cons of Working Capital Finance?
It’s important to research each option carefully to make sure you understand the benefits and risks associated with them. We’ve listed a few main points here to bear in mind.
Pros:
Increased liquidity
Working capital finance provides your business with the funds you need to cover short-term operational costs, making sure cash flow and day-to-day operations run smoothly.
Flexibility
Working capital finance can be tailored to meet your specific business needs based on the nature of the business.
Quick access to funds
Approval for working capital finance is often much quicker than for traditional loans, meaning that your business is free to deal with any immediate financial needs or take advantage of growth opportunities almost straight away.
Risk protection
Working capital finance can help protect your business from the risks associated with late payments from customers, unexpected expenses, or unforeseen circumstances that have an impact on your cash flow.
Cons:
Cost of finance
Working capital finance can come with higher interest rates or fees, which means you will pay more overall to borrow the money and this might affect your company’s profitability.
Potential debt burden
Taking on debt through working capital finance can increase the overall debt load of your business, which may reduce the chances of future borrowing applications being successful.
Collateral requirements
Some working capital finance options may need you to put up collateral, such as assets or inventory, which can be a barrier for your business if it doesn’t have enough assets to put towards the loan.
Impact on creditworthiness
If your business fails to make repayments on time or in full, your credit score can be affected, potentially making it harder for you to borrow more money in the future.
KEY POINT: Make sure any financial product you choose is fully affordable and beneficial to your business.
FAQs
How do I get working capital finance?
Once you have researched the options available to you, you can use a comparison website or contact an independent financial advisor to help you choose the best product for your needs.
Banks and other financial organisations offer many different types of business loans and credit options.
Government support can also be an option, particularly for smaller businesses.
How are working capital loans worked out?
Lenders will look at the assets and liabilities of your business – money in and money out. They will use this information to work out how much they can safely lend you.
The amount you can borrow will depend on how creditworthy your business is and your ability to make the repayments.
The interest rate and repayment terms will vary depending on the type of loan and your circumstances.
Working Capital Finance with Cashflow Solutions
Our business finance finder service can help you find the right working capital finance for your situation:
We can help if you are looking for:
- Working Capital – Fast funding solutions for your business with funding available within hours
- Asset Finance – Free up much-needed capital using asset finance. Funding packages for hire purchase, asset purchase and refinance
- Bridging Loans – Market-leading short-term funding for development & property projects
- Unsecured Business Loans – Access a large panel of unsecured business funders offering flexible terms and drawdown facilities
- Secured Business Loans – You may be able to secure finance using the assets on your balance sheet
- Commercial Mortgages – Access to the high street and specialist commercial mortgage lenders
A cash injection into your business when you need it
Our service is aimed at helping business owners source much-needed working capital for almost any business reason, so whether you are looking to make a payroll payment, purchase stock or new equipment or refurb your business premises, a working capital loan is something we can help with.
Working in partnership with our lending partners backed by the British Business Bank to deploy funds to support business growth and working capital
