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Working Capital Financing

Everything you need to know about working capital financing and how Zip Capital Group can help you meet your short-term financing needs.

What is a working capital financing?

Working capital financing is financing that is taken to fund a company’s everyday operations.  This form of financing is used to provide the working capital that covers a company’s short-term operational needs such as payroll, rent, and debt payments.  Working capital financing is not used to buy long-term assets or investments.  It is simply corporate debt borrowings that are used by a company to finance its daily operations.

How does working capital financing work?

Sometimes, a company does not have asset liquidity or cash on hand to cover day-to-day operational expenses and may need to take out financing for this purpose.  Companies that have cyclical sales or have high seasonality may rely on working capital financing to manage periods of reduced business

Many companies don’t have predictable or stable revenues throughout the year.   For example, toy manufacturers who sell their product to toy retailers may have sales that correspond to the sales cycle of their customers. Many toy retailers sell more product in the fourth quarter during the Holidays – more than at any time of the year.

To supply toy retailers with the product in the fourth quarter, they may design a new toy in the first quarter, build a prototype and test it in the second quarter, and manufacture it in the third quarter so it can ship in the fourth quarter. Activities conducted in the first, second, and third quarter all require capital to earn money in the forth quarter.

If a company does not have sufficient capital to fund operations the first, second, and third quarter, they may need to borrow the capital needed to satisfy orders in the fourth quarter. Once they are paid for their sales in the fourth quarter, they can pay back their working capital financing.

What is working capital?

Working capital is the difference between a company’s current assets and its current liabilities.

Working Capital = Current Assets – Current Liabilities

Current assets are assets that can be converted to cash fairly quickly, like say with a year. Current assets include cash, accounts receivable (a customer’s unpaid bills) and inventories of raw materials and finished goods. Current liabilities are monies that are due very soon and include accounts payable.

Net operating working capital is a measure of a company’s liquidity and refers to the difference between operating current assets and operating current liabilities. In many cases, these calculations are the same and derived from company cash plus accounts receivable plus inventories, less accounts payable less accrued expenses.

Working capital is a measure of a company’s operational efficiency and liquidity and its short-term financial health. If a company has substantial positive working capital, it should have plenty of money to invest and grow. If a company’s current assets do not exceed its current liabilities, then it may have trouble paying back creditors, growing, and may even be at risk of going bankrupt.

Key points of working capital

  • A company has negative working capital if the ratio to current assets to current liabilities is less than one.
  • Positive working capital indicates a company can fund its current operations and fund future growth and activities.
  • Too much working capital is not necessarily a good thing. It may indicate that the business has too much inventory and is not investing extra cash.

What are the pros and cons of working capital financing?

As with everything, there are pros and cons to working capital financing. An immediate benefit of working capital financing is that it is easy to obtain and lets business owners cover any gaps in working capital expenditures.

A second benefit of working capital financing is that it is a form of debt financing that does not require an equity transaction, meaning that the business owner maintains full control of the company, regardless of how dire the financing need.

Some forms of working capital financing is unsecured, meaning that the company is not required to put down any collateral to secure financing. However, only companies or business owners with a high credit rating can get unsecured financing. Businesses having little to no credit have to securitize their working capital financing.

Collateralized working capital financing that needs asset collateral can be a drawback. Additional possible drawbacks are that they can be tied to the business owner’s personal credit, and any missed payments or defaults will hurt their credit score.

What are the different types of financing for working capital?

There are various types of working capital financing that can be either secured or unsecured. These are the six most common forms of working capital financing:

  1. Credit Line or Bank Overdraft Facility

A good credit score, the interest rate and the maximum line of credit that you can get depends on the company’s relationship with the lender. An advantage that this credit facility has over other forms of working capital financing is that the borrower only pays the interest applicable to the amount that has been drawn down.

  1. Short-Term Financing

Unlike a line of credit, this form of short-term financing comes with a fixed payment period and interest rate. The repayment period is usually 12 months. Unlike the other forms of working capital financing, this form of short-term financing is usually secured. However, as stated previously, previous relationships with your lender really matter. As a result, if you have a good credit history, you may be able to get short-term working capital financing without any collateral.

  1. Equity Funding via Personal Resources

Equity funding working capital financing is usually obtained from personal resources, in the form of an investment from family or friends and home equity loans. This is the most practical financing facility available for companies without a credit history, such as startups.

  1. Accounts Receivable Financing

Most forms working capital financing is collateralized. Accounts receivable working capital financing is secured by the company’s accounts receivables, or confirmed sales order value of your company. This type of debt is ideal if your company lacks the funding needed to fulfill a sales contract or order. Lenders usually provide accounts receivable working capital financing to businesses that are reputable or have a proven track record for paying debts and fulfilling obligations.

  1. Factoring or Advances

This form of financing is very similar to accounts receivable financing. The only difference is that that instead of accounts receivables or confirmed orders, the value of financing is based on future credit card receipts. This form of debt is only appropriate for businesses that accept credit card payments.

  1. Trade Creditor

A loan that is provided by a potential or current supplier is called a trade working capital loan. Many suppliers will offer a trade credit facility if a company places bulk orders from them. To mitigate risk, expect that the supplier will thoroughly review the applying company’s credit history.

While we can do all forms of working capital financing, we tend to do more unsecured short-term working capital financing.

When should I be thinking about financing my working capital needs?

If you have determined that you need working capital financing, you should start the application process before you plan to access the funds. This enables you to navigate any possible delays that you may encounter in the application process.

The following situations may be an indication that you may soon need working capital financing:

An upcoming slow season: As we read earlier this post, some businesses do better certain months of the year. Working capital financing is often used to cover expenses to keep the doors open until the busy season rolls around again.

An increase in hiring: If you have recently hired more employees to expand your business, you may need working capital financing to cover your new employee’s salaries until your business becomes sufficiently profitable to sustain the new paychecks.

An increase is orders: For most businesses, there is often a lag between when a customer places an order for your product or service and when they pay. When you receive many orders at the same time, this can create a big problem because there are salaries to pay and product and services to buy before you are paid. Working capital financing can help minimize the gap between income and expenses until your business is paid.

Is working capital financing right for my business?

Working capital financing is often one of the easiest ways to leverage the potential of your business. Some forms of working capital financing are unsecured meaning that you can access capital without putting up collateral.

Working capital financing can also be a great solution for businesses that are small, just starting out, don’t have traditional collateral, or are in a period when they have low cash flow.

How Can I use the proceeds from my working capital financing?

You should use the proceeds from your working capital financing to fund short-term operating needs. For example, you should use the funds to:

  • Buy Inventory
  • Increase your cash flow
  • Fund a marketing campaign
  • Help with payroll expenses, or
  • Get through the season

 What are the benefits of working capital financing from Zip Capital Group?

Businesses can get approved for our working capital program even when they can’t get a traditional Financing. Instead of assessing your credit risk by looking at your credit profile, we look at the cash flow of your business, amongst other things. Your cash flow is the amount of money your business brings in every day.

When taking out a working capital Financing with Zip Capital Group, we take care of everything you need to get your business financed so that you can focus on what matters most, growing your business and getting it to where you need to go.

Are you ready for working capital financing to take your business to the next level? Contact us to speak to a Zip Capital Group Small Business Financing Specialist or call (800) 795-3919 today.

About Zip Capital Group

Zip Capital Group is a leading small and medium-sized business lender working with companies in a wide range of industries. In addition to Working Capital Financing, we can help your business with:

 

 

A SIMPLE THREE STEP APPLICATION PROCESS

apply-online

“Apply Online” It takes about 45 minutes to give us your business and ownership information

decision-making

Receive a decision within 48 hours. Review Financing terms to determine if it works for your business.

electronic-sign

When your Financing is funded, documents are signed electronically and funds are sent to your checking account.

or call us today at

1 800-795-3919

READY TO GET CAPITAL FOR YOUR BUSINESS?

 









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