Learning Centre

Sources of Working Capital Financing

SHARE ON: FacebookLinkedInTwitter

What is Working Capital?

A business’s working capital is equivalent to the amount of cash it can deploy very rapidly, as such even very profitable businesses can have working capital problems, in particular this can develop because of long dated payments from clients.

MarketInvoice’s unique offering

Unlike conventional working capital solutions, MarketInvoice doesn’t charge clients monthly fees, or require them to use MarketInvoice a certain number of times a year allowing firms maximum flexibility. We don’t ask for a personal guarantee or demand onerous charges. We also offer a completely confidential service.

 

Working capital explained

Working capital is the financing in a small business that helps a company pay its trade creditors and cash flow – it is the finance that businesses need for their day-to-day trading operations.

All businesses require working capital, but sometimes they are unable to access the cash that they need because they have to wait for large invoices to be paid – sometimes for up to 90 days.

There was a time when your bank would gladly help you through short-term cashflow difficulties with a loan or overdraft extension, but it’s become much tougher to access to bank finance. Even if you are successful, it can take can weeks to sort out – and you’ll probably have to provide a personal guarantee.

Another alternative is factoring, or a loan.

Short Term Sources of Working Capital Financing

Factoring Instalment Credit Invoice Discounting
Factoring is a traditional source of short term funding. Factoring facility arrangements tend to be restrictive and entering into a whole-turnover factoring facility can lead to aggressive chasing of outstanding invoices from clients, and a loss of control of a company’s credit function. Instalment credit is a form of finance to pay for goods or services over a period through the payment of principal and interest in regular payments. Invoice Discounting is a form of asset based finance which enables a business to release cash tied up in an invoice and unlike factoring enables a client to retain control of the administration of its debtors.
Income received in advance Advances received from customers Bank Overdraft
Income received in advance is seen as a liability because it is money that does not correlate to that specific accounting or business year but rather for one that is still to come. The income account will then be credited to the income received in advance account and the income received in advance will be debited to the income account such as rent. A liability account used to record an amount received from a customer before a service has been provided or before goods have been shipped. A bank overdraft is when someone is able to spend more than what is actually in their bank account. The overdraft will be limited. A bank overdraft is also a type of loan as the money is technically borrowed.
Commercial Papers Trade Finance Letter of Credit
A commercial paper is an unsecured promissory note. Commercial paper is a money-market security issued by large corporations to get money to meet short term debt obligations e.g.payroll, and is only backed by an issuing bank or corporation’s promise to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings will be able to sell their commercial paper at a reasonable price. An exporter requires an importer to prepay for goods shipped. The importer naturally wants to reduce risk by asking the exporter to document that the goods have been shipped. The importer’s bank assists by providing a letter of credit to the exporter (or the exporter’s bank) providing for payment upon presentation of certain documents, such as a bill of lading. The exporter’s bank may make a loan to the exporter on the basis of the export contract. A letter of credit is a document that a financial institution issues to a seller of goods or services which says that the issuer will pay the seller for goods/services the seller delivers to a third-party buyer. The issuer then seeks reimbursement from the buyer or from the buyer’s bank. The document is essentially a guarantee to the seller that it will be paid by the issuer of the letter of credit regardless of whether the buyer ultimately fails to pay. In this way, the risk that the buyer will fail to pay is transferred from the seller to the letter of credit’s issuer.

Long Term Sources of Working Capital Financing

Equity Capital

Equity capital refers to the portion of a company’s equity that has been obtained (or will be obtained) by trading stock to a shareholder for cash or an equivalent item of capital value. Equity comprises the nominal values of all equity issued (that is, the sum of their “par values”). Share capital can simply be defined as the sum of capital (cash or other assets) the company has received from investors for its shares.

Loans

A loan is a type of debt which it entails the redistribution of financial assets over time, between the lender and the borrower. In a loan, the borrower initially receives or borrows an amount of money from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same amount. Acting as a provider of loans is one of the principal tasks for financial institutions like banks. A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral. Unsecured loans are monetary loans that are not secured against the borrower’s assets.

Key Articles

SHARE ON: