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Working capital funding
Working capital funding allows businesses to access finance which covers normal operating expenses when they may be experiencing low cash flow. This is normally a short to medium-term loan which is designed to keep businesses running until they recover their cash flow.
- businesses with seasonal revenue (e.g. a ski resort may need to take out short-term funding in the summer months to pay ongoing expenses until peak season revenues come in)
- a business looking to access additional resources to fulfil a larger-than-usual project.
It’s expected that this type of capital will be repaid reasonably quickly and is a short-term solution to keep the business running until finance is no longer needed.
Common types of working capital funding
A working capital loan allows you to increase your short term cash flow, which helps your business survive through periods of low cash flow, or to scale your business to meet growing demand for your goods and services.
You can access both secured working capital www.paydayloanstennessee.com/cities/somerville/ loans (where your loan is tied to an actual asset as collateral), and unsecured working capital loans. Unsecured loans are generally only available if you have a high credit rating, so aren’t always an option for new businesses without a credit history.
Overdrafts are a more traditional source of funding, where your bank will extend you a line of credit, allowing you to continue to draw money from your business account even though it may technically be empty.
Overdraft accounts will have a set limit and operate like a credit card (the overdraft must be repaid by a certain date before incurring more fees). This can be a valuable and flexible way of securing short term funding that helps you meet your financial obligations through inconsistent cash flow.
The terms of your overdraft will vary depending on your bank, but they can become costly if you don’t manage it responsibly. You will often need to pay application fees, interest charged on the amount you overdraw, and then additional overdraft fees. Review the market to find the best available account option for your business.
A revolving credit facility is another form of flexible funding, where you have an agreement with a lender to withdraw money up to a pre-approved amount to fund your business, and continue to repay and withdraw within your limit whenever you need.
This is similar to an overdraft, though you don’t need to have an account with your lender, and is more flexible than a term loan, as you can withdraw money, repay it and borrow it again until the end of your agreement. There’s no fixed payment schedule, and your interest rate is usually variable.
Many businesses offer goods and services to their customers on credit by fulfilling an order and then issuing an invoice, which may not be due for up to 30 days. Invoice financing lets businesses access loans based on the amount due from outstanding invoices, and is a way to fast-track cash owed for improving cash flow.
This form of lending commonly sees a business ‘sell’ their invoices to a lender, who takes a percentage of the invoice as their fee for advancing the cash. You (as the business owner) keep control of invoice management and collection, and your customers have no idea that their invoice has been advanced. If your cash flow is only being held up by delayed or late invoices, this can be a great option for funding. Your maximum borrowing capacity will be limited by the total amount of your invoices.