Finding the Right Type of Working Capital Financing
Working capital is the cash that a company needs to handle its operational expenses such as rent, payroll, supplies, and other needs. It consists of the difference between a business’s assets and liabilities. When companies fall short of working capital through seasonal slumps, extended payment terms for clients, and unexpected emergencies, they often need assistance in making up the difference. Here are some sources of working capital financing you can consider when you need a boost to your company cash flow.
Line of Credit
A line of credit is an arrangement between your company and a financial institution for a loan on demand up to a stipulated limit. You don’t have to draw on the loan, but it’s available whenever you need it. Lines of credit are best arranged when your company is prospering so that you have working capital financing available during lean times.
Arrange for trade credit with your suppliers when you require supplies but need to defer paying for them. Establish good relationships with your suppliers so they are amenable to extending this form of working capital financing when you need it.
Inventory financing involves securing a loan with the inventory from your business as collateral. This type of loan is often used by companies that lack working capital to purchase products. It can enable you to quickly acquire inventory during peak seasons.
With asset-based financing, you obtain a loan for working capital using company assets as collateral. These may include equipment, machinery, vehicles, real estate, or accounts receivable. Asset-based financing is often utilized when you have plenty of orders but insufficient working capital to purchase the raw materials or supplies to fulfill them.
Short-Term and Long-Term Loans
Short-term loans are those that must be paid off within a year, while long-term loans offer more extended terms. These options provide working capital from traditional lenders such as banks, the Small Business Administration, cooperatives, and other financial institutions.
For more advice on obtaining working capital financing for your business, contact Diamond Commercial Group.