Advantages of Working Capital to Finance a Business

Owners of businesses that have been around for several years understand how important cash and cash flow are to their company’s health and viability. Strongly positive operational cash flow, or the cash flow the company generates from its business operations, means the company does not need to rely on financing or the sale of its assets to fund operations and growth. Much of this operational cash flow is working capital, defined as current assets less current liabilities. Working Capital Definition Working capital is the cash short-term, or current, assets bring in less the cash paid out for current liabilities. It provides the crucial funding your company needs to operate day to day. Current assets include cash, inventory, accounts receivable, notes receivable and any prepaids. Prepaids are what your company pays in advance for services not yet delivered, and they include rent and insurance. Current liabilities include short-term loans and accounts payable. Working Capital Importance Working capital indicates how well you positioned your company to meet its near-term cash needs. When your company has significantly more cash on hand or receivables that readily convert to cash than you have debt principal payments or payments to vendors, your risk of ceasing operations due to an inability to pay your bills plummets. Working capital financing can eliminate any gap between cash flowing into operations and cash flowing out. Speed and Flexibility One advantage of working capital financing is that most eligible companies can obtain short-term loans, including accounts receivable credit lines, inventory loans or bank lines of credit, in a short period of time. The loan amounts are typically a fraction of revenues and are tied to assets that quickly convert to cash. Working capital financing is generally flexible, with varying interest rates and repayment terms. This flexibility can help companies with seasonal or periodic fluctuations smooth out cash flow. Short-Term Options Accounts receivable credit lines and factoring, which occurs when your company sells its receivables to a third party at a discount, directly tie to your company’s accounts receivables. As your company’s revenues and associated receivables grow, the credit line increases. As your company needs more money, these working capital options make those funds available. These also provide a viable choice for smaller or newer companies without the operational history or balance sheet strength to qualify for a bank term loan or unsecured line of credit. Medium-Term Options Your company can also finance working capital with a term loan. Short-term working capital financing addresses cyclical needs throughout the fiscal year. Mid-term working capital financing provides the funds to purchase additional inventory and generate the receivables that increase working capital. For companies with growth prospects over the next few years, this option provides access to a steady stream of capital to cover gaps created by growth-related expenses. For more information call 740-917-4960 or email info@MYCompanyfunding.com.