Strategies for financing working capital
Can your business pay its debts as and when these become due? If you’re not always in this position, you may be looking for ways to boost your working capital.
Do you need funds for the day-to-day expenses? Or are you keen to build cash reserves for seasonal spikes in demand? No matter your needs, there are several options available.
How can you be sure you’re making the best choice? It’s important to carefully explore all your strategies for financing working capital. Sometimes, you need to look beyond the obvious route to find an approach that sets your business up for long-term success.
What are your options?
1. Equity finance
This is one of the most common strategies for financing working capital. While there are many types of equity finance , this approach generally involves selling ownership interest in your business. This means giving up some control – as well as some of your profits.
Equity finance could take the form of shares, if your company is incorporated. Another option is to inject equity funds from your own personal savings or inheritance. Or, someone you know and trust, such as a friend or family member, could invest in your business (sometimes called an angel investor). Hopefully he or she will not want to get involved in the management of your business.
If you choose to go the venture capital (VC) route, the VC fund will typically take an active role in managing your company. If you want to steer your company forward yourself, however, this may not be the best choice for you.
2. Bank finance
Not all small businesses qualify easily for of bank finance. You need a spotless credit record and the right kind of collateral. Even if you tick these boxes, today’s banks prefer to take on as little risk as possible and may make you wade through reams of red tape before they consider you for funding.
Many of the bigger banks demand hours of your time and then keep you waiting for months before your loan or overdraft is approved. Even then, you’ll have to wait a further few weeks (or months) for the funding to clear. This can stifle a small business, especially one that needs the financial agility to respond to market changes and new opportunities.
Do you deliver goods and services before collecting cash from your customers? If you’re waiting months and months for amounts owed but not yet paid, this can leave you in a risky cash position. But, on the bright side, these accounts receivable also reflect as an asset on your balance sheet – an asset you can use as a strategy for financing working capital.
With of factoring, you can access your funds before your credit sales terms are up, using your accounts receivable as collateral. In other words, a factoring company pays you around 75% of the invoice amount upfront. This company then deals directly with your customers on issues relating to credit control and payment. Once the invoice has been paid in full, in line with the credit sales terms, you receive the balance, minus an agreed admin fee.
More than just finance
When deciding on the best strategies for financing working capital, it’s important to think beyond the money. Which route provides the most value to your business?
One of the chief benefits of partnering with a good factoring company is the expert debtor admin services that you receive. The right factoring company will act as an expert credit control and debtor admin department. This means you spend less time in the back office and more time out in the field – or on the floor – building your business.
Why choose Merchant Factors?
Merchant Factors has been providing many different companies with working capital solutions for 30 years. The firm’s independence, experience and flat structure means that, unlike the banks, Merchant Factors is innovative, flexible and committed. It is also able to tailor its facilities to suit most companies’ unique needs – taking a real interest in the success of your business.
Finance beyond the Numbers.