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Working Capital Finance: Which Type Is Right For Your Small Business?

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Working Capital Finance: Which Type Is Right For Your Small Business?

Posted On May 19, 2015 BY Madhu Jain

Small businesses require substantial operating liquidity on any particular day. Working capital is an important metric, without which no small business endeavor related to manufacturing or production can bear the brunt and succeed. A company has available fixed assets.

The floating operating capital is considered as an important factor that fits the equation and evolves as an integral and important part of a company’s functioning. If the net current assets available with a company is lesser that the net liabilities on the company during a given year, then the company is termed to be suffering from inadequate working capital or working capital deficiency.

Working Capital Deficit

Small businesses suffering from working capital deficiency find it difficult to extend its business endeavor to subsequent stages of growth. Working capital finance is thus a requisite for small businesses. It helps relieve the cash-strapped strain and helps regulate the existing cash flow in a better and prolific vein.

Capital finances may be short term or based for longer duration of time. Either way, many cash related issues get resolved and available capital can be used to start-up businesses, fulfill a myriad of purchase orders, expand facilities and carry out thorough contract obligations.

Small business endeavors, proprietors, and partners should comprehend the various types of available working capital finance, which are crucial for reducing the deficit and make business easy. On the basis of types, working capital finance can holistically be sub-divided into seven key categories. Whether for shorter duration or longer, working capital financing helps in jettisoning worries and woes easily and quickly.

Accounts Receivable Financing

This is dubbed as A/R Financing and also commonly known as asset-financing. By this methodology, small or medium level companies can put their receivables as collaterals. Thus, borrowers can draw some finances or funds at a certain percentage of the valuation of collateralized receivables, as per financial agreements.

This looks profitable in the company’s perspective. It can easily free up capital. Moreover, by the virtue of A/R financing, companies can easily get back the day-to-day business proceeds and thus merely concentrate on producing and delivering goods and services rather than going about collecting receivables.

Purchase Order Financing

This has an acronym called P.O financing that is a short term finance based arrangement, with hardly any interest charged. Any lender availing PO Financing provides the funds notched up to the business endeavor to ensure quick and ease validation of purchase orders for single or multiple customers, including government agencies and national retailers.

The PO Financing arrangement shall enable the lender to look closely towards the credit rating of the borrower and see if the latter has a good repayment record. Further, it shall be comprehended whether the latter pays bills on time or has sufficient finances for ordering goods. Small businesses availing PO Financing receive substantial help.

Production Financing

It is a ready option for manufacturers needing substantial capital for expansion of facilities for producing goods. The borrowers are evaluated, documents collected holistically and offered secured loans. The loans offered are primarily for the ready purchase of new or already used equipment or for carrying out expansion of facilities. The lenders offer borrowers with sale lease-back options and provide a plethora of opportunities for financing industrial projects. The debts can be easily paid back; the repayment may conform to cash flows drawn from new business opportunities.

Contract Financing

This is also a pretty good solution for all small business ventures that have contracts with customers locked in and thus are in regular need of working capital, especially during period of deficits. By this process, lenders provide borrowers cash in advance on the basis of the latters’ work contracts with the customer base. The funds are used on a regular basis for day-to-day operations and functioning of business endeavors. The funds may be obtained before payments on the basis of work contracts start kicking in.

In general, a myriad of small companies prefers to seek for contract financing. This is beneficial when the company enters into valid contracts with customers or clients of valuation much larger than any prior engagements. Moreover, they should have a need for immediate capital in order to satiate the contract, adhering to the terms and conditions. The contracts also suffice prevalent business obligations.

In contrast to other forms of financing for small or medium enterprises in need of working capital, contract financing is particularly beneficial for small business enterprises, endeavors or proprietorship. Contract financing is helpful in getting a service completed, not eventually before any product is complete. This has been rated as one of the most useful financing options for firms suffering from working capital deficit or lack of funds.

Bank Overdraft

A customer having fairly good credit score can easily avail bank overdraft. However, the maximum credit that can be availed or the percentage of overdraft against collaterals depends entirely on the total relationship value of the customer and the rapport with the branch head. The borrower doesn’t quite take a loan. The payment needs to be made as interest for only the amount that is overdrawn. The rates depend on the ones settled by the bank.

Trade Creditor

This is a kind of loan provided to potential suppliers requiring capitals on an urgent basis. The suppliers offer trade credit that facilitate in dealing with the bulk orders placed from their units. A trade creditor will summarily evaluate and thoroughly check on the credit history of any company, analyze and assess various parameters before choosing to provide substantial credit to the customer.

Equity Funding

This is another type of loan obtained from friends, home equity loans or family members, i.e. personal resources. This is ideal for a myriad of companies starting up small endeavors. This is a practically feasible loan facility, especially if the company is new or has no or bad credit history.