What Is Working Capital Finance?
Working Capital Defined
Working capital is an amount of cash a business can safely and strategically spend at any given time e.g. January. The boring finance explanation is current assets minus current liabilities. More frequently, working capital is calculated based on cash, assets that can quickly be converted to cash and expenses that will be due within 12 months.CHECK ELIGIBILITY
Understanding Working Capital Loans
Simply put, working capital finance is a type of business finance designed to boost the ‘working’ capital available to a business. More often than most small and medium sized businesses use it to fund specific growth projects such as starting to invest into new markets, taking on bigger contracts or simply financing the lease of equipment. The reasons why individuals take out working capital loans varies widely and there is no right answer as long as it isn’t wasted, strategic financial planning is key.
Different Types of Working Capital
There are many different types of lending that could be considered ‘working capital’ finance. Capify mainly has two small business working capital products, our Capify Business Loan or a Merchant Cash Advance. The right capital loan for you will depend on your individual business needs and the industry you operate in. They are designed to help you with working capital, but one may be more relevant to the requirements of a specific sector. For example, if you run a retail business you are more likely to take nearly all your income through a card terminal. Capify’s MCA finance product would be perfect for this purpose.
Advantages & Disadvantages of Working Capital Loans
Advantages of Working Capital
One of the main advantages of having unused working capital is that you have more flexibility, enabling you to satisfy core business needs effectively and on time. You can invest and expand your business into new product areas or use as a cushion for those times where your costs are just that bit higher than normal. Retail companies usually have a greater need for working capital loans as stock often ties up unused cash until it is sold, and not all of it is sold quickly. So, working capital loans are a real advantage to retailers but also many other business types.
- Evade interruptions in day-to-day operations – Working capital loans will enable you to pay key suppliers on time meaning you have a consistent flow of products for customers. Keep that inventory well managed.
Disadvantages of Working Capital
Despite the advantages of working capital, like everything there is two sides to every story and undoubtably there are also some negatives. For example, if not managed correctly it can lead to the unnecessary purchase of inventory in bulk, which can be tempting but, can lead to mishandling, waste, theft and loss increases. It also creates idle funds within your company, meaning stock that is just sat in your warehouse is money that could be free cashflow used to pay staff or suppliers. There are also several disadvantages to not having enough working capital in your business for example:
- Day-to-day operations are drastically affected – Your ability to pay staff, suppliers and make important purchases is severely restricted;
- Capital loans have higher interest rates – Working capital loans typically have higher interest rates. Businesses should ensure that this is a risk worth taking, to avoid being tied up in repayments with hefty interest.
What is Working Capital Management?
It’s essential within a business of any size that great care is taken to proactively manage working capital effectively. Working capital management is a practice of maintaining a smooth operating cycle. This cycle should never stop no matter if it’s for buying raw material, paying staff or tax payments. Traditional manufacturing businesses require a significant investment in inventory due to needing raw materials and having lots of work in progress. Larger businesses utilise just in time supply chains meaning this is less of a concern. Good capital management will provide you with better returns on capital and increased profitability. You can achieve this by:
- Optimal return on current asset investment – You should have good short-term investment channels to enable you to take benefit of idle funds. This is particularly relevant for seasonal business owners such as hotels.
- Lowest working capital – Aim to achieve a smooth operating cycle, keeping the day-to-day requirement for working capital at the lowest. Try ensuring your inventory management is efficient and you have good terms with your accounts receivable. This enables you to gradually use the funds for business growth rather than general expenses.
- Utilise good working capital loan providers – Find out more about our small business working capital business loans and merchant cash advance.
Why is working capital so important for SEM’s?
According to the Federation of Small Businesses, over 30% of small businesses fail due to having shortfalls in their cash flow. Therefore, it’s so important to ensure you strategically plan out your finances and keep track of your cash flow on a rolling basis. You don’t want to get to the end of the month and realise that you can’t afford to pay a big supplier. Working capital loans are the perfect solution to help your business run that little bit more smoothly.
- 43% of small business owners admitted that late payments affected their mental health, causing sleepless nights;
- 52%of small business owners have used personal savings or borrowed money from friends and family to keep their businesses alive. Source.
Calculating Unused Working Capital
Whether it’s yourself or your accountant frequently working out your free working cashflow is essential to ensure you have the ability to grow your business and can be a key indicator of a successful well-run business. Free working capital is an important figure to keep track of regularly in your business as it gives you a headline indication of what cash is free to use and invest. We know that small businesses struggle to keep this figure positive which is where Capify business loans become useful to you. Why not work out your free working capital now?
Unused Working Capital = (Net Income + DA – CWC) – Capital ExpenditureCHECK ELIGIBILITY
Our small business finance calculator enables you calculate how much you can borrow and what it’s going to cost. Apply now and secure a working capital loan with us.
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