working capital
07/04/2022

Working Capital Financing: A Beginner's Guide

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Working capital financing is that kind of funding intended to help business owners increase the amount of working capital they need for various purposes. You can use them for everything from filling in occasional cash flow gaps to expanding your business.

Essentially, this financing frees up working capital for borrowers' businesses that they intend to recoup within a short period. However, as we'll explain below, you'll need a clear picture of your current assets and liabilities in order to determine your working capital amount.

Borrowing capital is a common practice for businesses of all sizes. However, to ensure that the numbers make sense, you should understand your needs and the formulas before considering working capital financing.

Working Capital Financing for Small Businesses

Small businesses often struggle to meet their working capital needs by relying solely on accounts payable. As a result, companies often use a combination of net profits and borrowed funds to bridge the gap in financing.

Working capital financing, however, is a liability and should be included in your ratio. If you aren't careful, borrowing could negatively impact your business's profitability and cause its failure.

There may be a lot of accounting mumbo jumbo here, but it is vital to understand. Most businesses rarely attain the 2:1 ratio. Nonetheless, half of all companies that begin today will go out of business within five years, so this metric is essential.

Does Working Capital Financing Make Sense for Your Business?

You may consider borrowing to cover any short-term gap once you have determined your working capital needs and your internal cash flow. Businesses like landscape contractors might borrow to bridge between seasons, for example, to fund seasonal inventory buildup.

A short-term loan might not be a great choice if you are unable to afford the periodic payments, especially if your ratio goes negative. However, working capital requirements of businesses with seasonality can (and should) be anticipated in advance.

You can finance your working capital needs in addition to your receivables:

Trade Credit

It is possible to negotiate payment terms with your vendors and suppliers to accommodate the seasonality of your business if you have good credit terms.

Most suppliers are willing to work with their best customers to fund large orders for new contracts or to bridge short-term working capital shortages. You'll likely have better luck negotiating with a supplier if you're already on good terms with them.

Factoring

The textile industry uses this method to free up funds because the manufacturing process can be lengthy, and the payment cycle may not be speedy.

In essence, you are selling your accounts receivable at a discounted level to gain access to working capital instead of waiting for manufacturing and payment.

Factoring could be an option if you offer your regular customer payment terms and invoices for your goods or services.

A Short-Term Small Business Loan

The working capital needs of a small business can be met with a short-term business loan (think three to 12 months).

Your business may have more than one option available, including a short-term small business loan, depending on your credit profile, the industry you're in, and the overall health of your business.

Line of Credit

Small business loans can be more challenging to qualify for than lines of credit. Still, for those who are eligible, they provide the capability to access a credit line when you need it, pay interest on the credit amount you use, and then use it again. You can get a line of credit from traditional lenders like banks and credit unions.

Does UFUND Offer Working Capital Financing?

UFUND is positioned to achieve the goals it set out for its product and token by solving the shortcomings of the traditional economic system and gaining a high degree of adoption and liquidity. By embracing elements from the models, we seek to change; our ecosystem will permit investors to realize their earnings in a way that guarantees.

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