How can you Finance your Working Capital Needs?

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A firm is able to continue its operations with positive working capital. It ensures timely payment of short-term debt and upcoming operational expenses. Working capital has an impact on your long-term investment effectiveness.

Though a short-term low working capital is not alarming, it becomes a cause for concern in the long run. Without sufficient working capital, your business won’t be able to meet it day-to-day expenses.

If your business is running short on working capital, you should consider seeking funds from an external source. Here are some common sources along with their pros and cons-

  • Vendors

Negotiating a longer payment period with your vendors is a non-monetary way to generate working capital. Instead of cash-on-delivery, paying on a later date will buy you more time to turnover inventory and create cash inflow.

On the other hand, if you are serving as a vendor, you can offer your customers discounts for early payments. Prompt repayments will generate working capital for your business.

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Pros

  • Negotiating a deal and honouring it will establish a long-term working relationship with your vendors. These connections will be useful in the years to come.
  • The ease of accessibility makes this a popular source to meet short-term needs.
  • A non-monetary source prevents any misuse of funds. The inventory purchased will be sold to generate cash that has a pre-decided purpose. It will be used to repay vendor and suffice other operational expenses. It integrates well with the business’s everyday operations.

Cons

  • Though it is easy to access, there is no guarantee that a vendor will agree to this arrangement.
  • Often vendors charge a higher rate of interest that other sources.
  • Personal Savings

Often start-ups and small business struggle to get approved for loans. In this case, entrepreneurs’ resort to self-financing.

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Pros

  • Since it’s your own savings, you don’t have to clear an approval process. It offers quick access, as and when the need arises.
  • You don’t have to pay back any interest or borrowing fees.

Cons

  • There is only a limited amount available. There is no certainty that you will have enough to replenish your working capital.
  • Savings are a safety net. By financing your working capital, you will put you savings at risk. If not used prudently, you won’t have any finances to fall back on.
  • Commercial Bank and Online Lenders

Traditional loans and online lenders are some of the most popular forms of borrowings. Depending on your operational requirements, you can use personal loans, short-term loans or fast cash loans. For more information click here.

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Pros

  • This form of borrowing is quite readily available. In particular, online loans are gaining popularity because of their fast and easy accessibility.
  • A new business might not be credible enough for credit advances from vendors. In such cases, commercial loans are the only option beside personal savings.
  • They are one of the more affordable options since they have a fixed interest rate.

Cons

  • Working capital is often required for immediate payments. Commercial loans involve time-consuming paperwork and approval process.
  • Commercial loans often require collateral. Failure to repay on time will put your assets at risk.
  • Business Grants

Several government and private organisations offer business grants to promote entrepreneurship. Securing a business grant will be highly favourable for the growth of your business.

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Pros

  • Business grants are a free source of financing. There is no interest or repayments, which is perhaps the biggest advantage of a business grant.
  • You can apply for as many grants as you want. There is no limit.
  • There are numerous grants available for all kinds of industries, ethnicities and so on.

Cons

  • Even though there is no limit to the number of grants you can apply for, getting one is rather difficult.
  • Payments for operational expenses are immediate and cannot be delayed. There is no assurance of receiving a grant. Unlike a loan, where you know the timeframe, securing a grant can’t be predicted.
  • The approval process for business grants is quite intensive. It can take a long time before you hear back, if at all.

In conclusion, maintaining a positive working capital is important to fully cover your short-term liabilities and ensure survival in the long run. Procuring the right source will enable smooth business operations and financial stability.

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