Top 5 Ways To Raise Working Capital For Your Business in 2022
Working capital is the bloodline of every business. Organisations require working capital to fund operations and meet short-term obligations, such as making regular payments, covering unexpected costs, purchasing raw materials, paying employees and vendors etc. This explains the importance of working capital.
But what exactly is working capital? The definition is known to established business owners, but those willing to start their own ventures must understand that working capital refers to the financial condition of a business.
To be precise, working capital is the difference between a company’s current asset and current liability. Now that individuals know about working capital let’s focus on different ways to raise it in 2022 to ensure smooth business operations.
Working Capital Loans
One of the effective ways to raise working capital for a business is to opt for a working capital loan. A working capital loan is usually availed by businesses to finance their everyday operations and not to purchase long-term assets or investments. Businesses that depend on high seasonality or cyclical sales can find working capital loans an ideal option, helping them bridge the gap during minimal business activity. Since it is a loan based product (which can be secured or unsecured), i.e. debt financing, businesses can retain full control of their company and need not make an equity transaction.
Bank overdrafts are another common way of covering working capital needs and providing a backup for unexpected financial emergencies. Businesses that face a lot of fluctuation in working capital can easily rely on this type of financing option. Banks offer overdraft facilities to companies that allow them to withdraw funds when there is not enough monetary backup to cover a transaction or withdrawal. Bank overdraft is like an extension of credit offered by a lending institution when there is zero account balance. Unlike a fixed business loan, the interest outgo is considerably less in the case of a bank overdraft as business persons have to pay interest only when they avail the facility.
Merchant Cash Advance
The financing option of merchant cash advance is slowly emerging as a popular way of raising working capital for business in 2022. Unlike a typical business loan, the merchant cash advance allows businesspersons to have access to cash in advance against future cash flow. In short, when businesses take merchant cash advances, they give away future credit sales for immediate payment. A business that relies primarily on cyclical sales and requires funding during reduced business activity can find merchant cash advance a real problem solver. Businesses can pay back when their business activity/sales get traction. Remember, when companies take a merchant cash advance, they allow lenders to deduct an agreed-upon percentage every day from their credit or debit sales. The deductions can be higher or lower depending on the sales, so businesses can enjoy a flexible repayment.
Trade credit can act as an important source of working capital funding. Here, a business usually supplies goods and services and extends short-term credit to another company to purchase those goods and services. Trade credit is usually not as stringent as a bank loan. However, there can be terms and conditions and penalties as well as interest accumulation on late payments. Trade credit is a mutually agreed funding option wherein both the parties involved can benefit. Wondering how? Businesses can stock up during peak time without paying any cash upfront. On the other hand, suppliers of goods and services can attract more customers by following this business trend.
Invoice discounting is another effective funding option that helps businesses obtain credit for a certain percentage of their unpaid invoice’s total value. Thus, companies can ensure a consistent cash flow and manage all activities. Here, businesses can avail a loan by pledging their trade receivables as collateral. This funding option enables businesses to receive advance cash that is tied up with customers through invoice discounting.
Invoice discounting helps increase cash flow in any business/organisation, thus helping to ensure growth whenever the right opportunity strikes. Here, businesses can get instant cash without waiting for their customer’s payment and expand their business.
Businesses willing to unlock cash, i.e. working capital, can rely on leading financial solution providers like KredX. On the KredX Invoice Discount platform, businesses need not wait for several days to get paid for goods and services. Eligible businesses (a business that supplies goods and services to large blue-chip companies) can utilise their organisation’s unpaid invoices as collateral and get instant cash against them.
With the changing economic environment, the methods of obtaining funds are also taking new directions in 2022. Therefore, instead of relying only on traditional funding options, businesses are opting for different and new ways of raising working capital. These funding options or methods ensure steady cash flow in a business, thus meeting short-term obligations and maintaining a positive working capital (a scenario where a business’s current assets are higher than current obligations).