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, such as Kapitus.

  • 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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