What is Working Capital Funding?

Working capital funding is aimed at augmenting a business’s working capital. Entrepreneurs often use it to invest in a new market, take on a larger contract, or other expansion initiatives.

Different businesses use this type of funding for different purposes, but in general, the idea is that using it makes cash for growing the business available. Ideally, you get returns on this cash in the short- to medium-term.

What is Working Capital?

Working capital is the difference between a business’s liabilities and assets. The former include accounts payable, while the latter include raw material inventories, customer debt, and cash. This capital reflects a company’s liquidity, short-term financial health, and operational efficiency. In addition, positive working capital is key to a company’s potential to grow and invest.
A company’s assets must exceed its liabilities. However, having a high working capital is not an ideal scenario either, as it means the company is not investing enough or missing important opportunities.

Types of Working Capital Funding

These include working capital loans, overdrafts, factoring, revolving credit facilities, and more. This section will go into each type in more detail.

Working Capital Loans 

These loans are often aimed at new opportunities and taken out with the purpose to boost cash flow. Unsecured loans are given in exchange for a personal guarantee, while secured loans will require you to pledge assets as collateral.

Bank overdraft

An overdraft as a funding source means you can spend more than you have in your account. Often, this type of funding is quite limited.

Factoring

Factoring involves cash flow financing by means of selling invoices at a discount to a third party. Factoring facility arrangements tends to be limiting and is often associated with losing control of business credit functions.

Revolving Credit

A revolving credit facility provides a financing source that has been approved in advance, similar to an overdraft. For this type of funding, you don’t need a bank account with that specific financer.

Invoice Finance

This is a popular type of working capital funding among businesses that offer their clients credit terms. It is based on the money owed to your company. Typically, you obtain a portion of the value owed via the whole debtor book or a single invoice.

Asset Refinancing

This type of funding is based on high-value assets, so you won’t usually be required to involve your home or offer a personal guarantee. The funding amount depends on what the items used to secure it are worth.

Invoice Discounting

With invoice discounting, the client has full control of their debtors’ administration. Moreover, this funding mechanism lets your business release funds that are tied up in an invoice.

Supply Chain Finance 

Supply chain finance is based on buyers’ creditworthiness. The lender pays the supplier immediately, but the buyer can postpone payment. The lender and not the supplier bears the payment delay.

Merchant Cash Advance

You can increase your working capital by accepting customer payments via card terminals. The amount you can get is usually expressed as part of your average card revenue per month. One benefit of this type of working capital funding is that future card revenue is the source of repayment, making repayment easier.

VAT funding

Finally, you can get a loan for your VAT bill. This will make it possible for you to spread your expenses over up to a year.

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