Working capital is the life blood of any business, especially a small business.
Working capital is the amount of money available to the business to ensure that it can cover its day-to-day operational costs and meet its short-term expense obligations. Without sufficient working capital the business will not be able to continue to trade and will liquidate.
What is Working Capital?
Working capital consists of all money available to the business which includes accessible cash from disposable income (meaning the money that is left from your monthly income after you have paid your overheads), from savings, approved credit facilities, outstanding monies due from customers, stock-on-hand, capital injection from shareholders, liquid investments (i.e. investments that you have immediate access to) and any assets that can easily be converted to cash.
Having ample working capital allows you to cover overheads, provide for unexpected expenses, take advantage of unanticipated opportunities, qualify for bank loans, negotiate favorable supplier credit terms and fund growth.
If you are struggling with your cash flow and do not have sufficient working capital there are a variety of short term sources of funding available to your company. To access these funds will require varying levels of collateral, personal guarantees or interest costs.
To determine the working capital funding you require you will need to work out the expected flow of money into and out of the business for the next year.
Short Term Working Capital Options
There are a number of different short term funding options available to businesses to fund working capital; the most appropriate one will depend upon you knowing exactly how much you need and for how long.
- Taking customer deposits before commencing work
- Offering discounts to customers for early payments of invoices
- Buying on monthly account rather than cash where possible
- Negotiating better payment terms with your suppliers (e.g. 45 or 60 days instead of 30 days)
- Applying for overdrafts & credit facilities from your bank
- Invoice financing (getting cash from lender while you wait for customer to pay outstanding invoices)
- Securing contract finance
- Retail Finance
Overdrafts and Credit Facilities
For smaller working capital needs, overdrafts, credit cards or revolving credit facilities can be very useful. This means that you will be able to quickly access funds should the need arise without needing to make lengthy loan applications.
Visit your bank to enquire whether you are eligible for these options. They will examine your business accounts to evaluate your risk profile and ensure that the business will be able to repay any amounts borrowed. In both cases, you are charged interest on the monies borrowed. It is important to know that if you have a poor credit rating you are unlikely to be able to access this type of funding.
If the cash crunch in your business is due to late payments of outstanding invoices by customers, especially large reputable organisations, then invoice financing is a good option to explore. There are a number of finance houses who are willing to provide you with up to 80% of the value of the invoice owing to you within three days of requesting the money; provided you can prove that the work has been completed and signed off by the customer and you have issued the invoice to the customer.
You will be charged an administration fee and interest on the money borrowed. Should the client not pay the invoice in time, penalties will be incurred. Have a look at more details on the various types of invoice discounting and factoring (often referred to as Debtor Finance).
If you have landed a contract or tender but need finance to purchase the supplies or to hire the resources to execute the work, you can apply for Contract Finance. Similarly to invoice financing, it is usually necessary for your client to be a large, reputable company with a good credit history.
You’ll need a signed contract, or at least a signed Purchase Order and should preferably be able to show that your business has the experience and expertise to complete the work to the required standard. Read more about Contract Finance by clicking on this link.
If you have a retail business and generate your revenue through the use of debit or credit cards, then there are lenders who are prepared to provide you with an upfront loan based on your Point Of Sale income.
You’ll need to be generating at least R30 000 per month and repayments are deducted from each card swipe. This means that during good months you’ll repay a larger amount than during poorer trading months.
Getting prepared to secure the funding you need
It is important to always be ready and prepared for raising finance and this means making sure you have your house is in order when it comes to the documentation that lenders require. It is helpful to create a Dropbox folder today and start filing the standard documents lenders request.
These include but are not limited to your company registration document; certified copies of the members or directors ID’s; statements of assets and liabilities for all the members or directors; a copy of the office lease if you are renting or the deed if the business owns the property; six months bank statements of all business banking accounts; latest signed-off financial statements; up to date management accounts; outstanding debtor analysis; details of any collateral you have; budget / cash flow forecast and tax clearance certificate to prove your taxes are paid up.
Another great tip is to make use of your free annual credit record check to check if there is anything that requires your attention as lenders will check your rating. Being one step ahead and knowing in advance what they will find enables you to address the problems and if this is not possible, then to choose alternative and more appropriate lending options for your working capital needs.
Finding Lenders for Working Capital
To find lenders for any of the working capital options mentioned above complete our online finance quiz to be matched with all lenders that meet your lending needs. Once you have answered all the questions, we will show you a list of lenders that match your specific finance requirements.