Capital is the backbone of a business. Not only is it the measure of SME India’s liquidity, efficiency and overall health, but it is also indicative of the firm’s ability to meet its short-term obligations. Typically, a company’s working capital is calculated by subtracting the company’s current assets from the amount of its current liabilities.
When a company’s working capital is assessed, factors such as the types of current assets and how their ability to be converted into cash, the nature of the company’s sales and how customers pay, the existence of an approved credit line, and how accounting principles are applied, are all taken into account.
More often than not, it is long and delayed payment cycles that derail the working capital of a company. While a business may not be able to escape this always, the following methods can be used to take care of its working capital needs:
#1 Business line of credit Every business could, sometime or the other, need more cash than it has on hand. That does not mean a business owner needs to turn new opportunities away. This is where the flexible option of Business Line of Credit comes into being.
Not only does this model of financing, or start-up business loans, let your business tap into funds to expand its operations, but it can also help boost revenue by allowing you to finance new income streams.
#2 Accounts receivable financing Invoice financing is a form of short term borrowing which is extended by a lender, to its business customers, based on unpaid invoices. This, appearing as working capital, increases a company’s financial flexibility and lets the company seize any opportunity that comes its way or simply carry out regular operations without struggling for credit.
#3 Instalment credit and vendor financing Vendors play a vital role in any business. Installment credit and vendor financing boost the working capital of SME India either by discounting invoices for the goods supplied or services offered by the vendor, or allowing the company to pay for the same via regular installments.
#4 P.O. financing Purchase Order is an excellent source of filling working capital and providing SME India with start-up business loans.
In this unique source of financing, a lender provides instant working capital to those businesses which already have customer purchase orders.
This type of financing is often used by companies with a high cost of goods sold.
#5 Income received in advance Relationships play a huge role in any business. If you share a healthy working relationship with your customers, you may be able to request for an advance payment to procure the goods to be delivered.
#6 Bank overdrafts A bank overdraft provides emergency funds if a company’s bank account can’t cover expenses. This amount is limited and an expensive financing option due to the hefty fees levied.
#7 Trade finance In an import and export business, opting for trade finance helps fill working capital needs.
The exporter requires the importer to prepay for goods shipped, and to reduce risk the importer asks the exporter to document that the goods have been shipped.
The importer’s bank assists by issuing a letter of credit to the exporter and providing for payment upon presentation of certain documents. The exporter’s bank may make a loan to the exporter on the basis of the export contract.
#8 Letter of credit For their need of working capital, sometimes business owners turn to a letter of credit.
A letter of credit protects the interests of a seller. It is a document from the bank that guarantees payment of goods to a seller should the third-party buyer fail to pay upon delivery. In this case, the bank takes the risk of payment failure upon itself and frees the seller of the threat.
Working capital, as stated above, can be made available to a business through various means. It is wise to understand each source of financing, weigh its advantages and disadvantages before picking the option best for your business