Working capital

It happens time and again – the order book is healthy, customers love the product or service, and things could not be going better. Until, that is, someone checks the bank balance and sees the cupboard is bare. With money tied up in stock and clients taking full advantage of credit terms or being slow to pay, it is suddenly impossible to pay salaries or purchase essential supplies to keep the business going.

Working capital is the lifeblood of business

The tragedy is that maintaining working capital for a business like this through external funding options is a simple matter. If the business was fundamentally flawed it might be different, but where it is simply a case of needing to maintain cash flow to keep the business running smoothly and profitably, lenders will be waiting with open arms and cheque books at the ready.

Funding options

The good news for borrowers is that there is an abundance of choice. Here are a few of the most popular ways to give your company a quick cash injection when it needs it:

• Bank overdraft – your bank will provide an agreed safety net by which you can go into the red, and the fees or interest charged are usually low. It sounds like the obvious solution, but there are a couple of stumbling blocks. One is that in recent years, banks have been less willing to offer overdraft facilities on business accounts. The other is that even if they do, it is typically a relatively small amount.
• Invoice financing – this is a great way to smooth out the peaks and troughs of cash flow. Invoice finance can help if money is tied up in outstanding invoices. The lender will give you access to a proportion of the money owed to you in advance, and when your customer pays you get the rest of the money minus a small fee.
• Revolving credit facility – most commonly compared to a bank overdraft whereby you are given a credit limit that you can dip in and out of whenever you need. The advantage here is that you only pay for what you use and there are no fixed monthly repayments. It is a valuable facility to have at the ready, just in case you face a difficult month.
• Business loan – probably the most popular way to borrow to help with working capital. A lender will give you a set amount of money to be repaid monthly over a few months up to a few years.