Any business needs money to meet the daily expenditure which includes raw material purchase, wages for workers and overhead costs. The amount required by the business to run the day-to-day operations is working capital. The Working capital can be classified into regular working capital and short-term working capital. Regular working capital enables a business to cover all the business objectives while short-term working capital covers daily business operations.
Most small businesses will need more working capital at some point which the business itself fails to supply. Fortunately, there are several resources that can help small business the cash required for day-to-day operations. The working capital loan can be sourced from bank loans, Line of Credit, Trade Credit, asset-based financing and inventory financing.
Working capital or the amount required by a small business to conduct day-to-day activities can be obtained from Banks in the form of small business loans. Small business can seek a working capital loan from commercial lenders, local banks, credit unions and government. The duration of loan can range from one year to seven years. The assets of the small business secure these types of loans.
Lines of Credit
The line of credit can be availed by small business owners if they need recurring funds at regular intervals to run the business. This type of working capital finance can be obtained from banks and other lenders. The line of credit allows the borrower to acquire funds on demand. The repayment terms are short, and this type of loan is ideal for short-term working capital. The Line of credit finance is secured by the assets of the business, and the interest rates are slightly expensive than standard bank loans.
Trade credit is a credit obtained by the business from the long-time suppliers. The supplier supplies goods to the business on credit which means payment for the goods provided will be paid later resulting in cash flow. The trade credit is a source of working capital that may be acquired from all long-time suppliers. Trade credit terms differ with each supplier and are typically not more than 90 days after the goods supply date.
Financing against assets and Bills Receivable
A small business may use its assets to source working capital loan from banks and financial institutions that provide loans against assets. The assets include vehicles, machinery, tools and accounts receivable. The accounts receivable are bills receivable from customers that owe money to the business and can be traded for financing working capital. The financial institutions will buy bills receivable documents from the business at a discounted rate and later collect them directory from the customers that owe money the business. However, discounting bills is a pricey way to obtain working capital for business.
Loan against Inventory
A working capital loan is secured with the amount of inventory or stock owned by the business. The inventory can be anything that a company holds for manufacturing or for providing services. The stock acting as security for the business loan cannot be sold until the loan is completely repaid. The lender holds the right on the inventory till the whole loan is repaid.
With the help of one or more of the above sources, a small business can finance working capital loan from banks and financial institutions to meet the short-term working capital requirements and help the business operate smoothly till achieves a self-sustaining state.