5 Types of Working Capital Financing
Businesses usually need working capital in order to fund their daily operations like paying wages, purchasing inventory or paying rent and utilities. Since many companies may not make enough to be able to pay for these expenses themselves, they often need to turn to financing.
A common method of financing is taking out a loan from a bank or credit union. If a business is confident they can pay back the loan within twelve months, they may choose to obtain a short-term loan. Since interest rates accumulate over time, this type of loan can be advantageous since the borrower usually ends up paying less interest.
For expenses that may take a while to pay back, a long-term loan may be a better solution. These loans may be for several years and can be beneficial because the monthly payments are spread out over many months and, therefore, are usually less.
If a business has many accounts receivables, they can use them to get working capital financing. Accounts receivables may pose problems for some companies, since there is often a delay between when the work has been completed and when payments are made. Businesses may need to pay their bills immediately and not in thirty or even sixty days when their clients’ bills are due. Instead, they can sell their accounts receivables and get paid sooner for a significant portion of their A/R’s worth.
Some organizations may use a business credit card to pay for their daily expenses. Typically, the credit card will have a certain limit on it, and the company may use the credit card for whatever expense they need, as long as the outstanding balance does not exceed the limit. Then, each month, the company can choose to pay off the full amount, make minimum payments or any amount in between.
If a company purchases supplies or materials from other businesses or uses another company’s services, they may be allowed to pay for the goods or services several weeks or even months later. Many times, this time delay is a courtesy that businesses give to each other, and interest payments are usually not necessary during these situations. Nevertheless, some businesses may offer discounts for paying the bill sooner. In these circumstances, waiting until a bill is due should only be done when money is tight.
Working capital is often crucial for businesses to function effectively. There are various types of financing available in order to accumulate the necessary funds.