In the event that a business finds itself in cash strapped situation for whatever reason. The availability of funds to enable a business fulfill its day to day financial obligations is vital to that business’ existence. Working capital applies to a business’ ability to meet all its financial obligations consistently. Inability of a business to meet its financial obligations could adversely affect its credit ratings and reputation.
There are a number of factors that affect a business’ working capital level or the need for that business to source for working capital funds. Some of these factors include the cost of inventory, payroll, debt and lease.
When it comes to working capital, businesses that have a high turnover in inventory usually require less capital. Such businesses include convenient stores and fast food outlets. The high inventory ensures that there is a consistent cash flow therefore providing the needed working capital. On the other hand businesses with low inventory turnover require added sources of funding to their working capital to enable they meet their obligations even in times of low sales volumes. Such businesses include equipment manufacturers and specialized gift stores.
A sale and leaseback strategy is often viewed as one of those capital financing programs that can get business owners the much needed working capital. This strategy involves selling an asset that the business does not consider essential to its operations. The sale agreement usually makes provisions for the business to lease the previously sold asset therefore making it possible for the business to continue using the asset same as before the sale and leaseback strategy was implemented. What a sale and leaseback strategy guarantees, is the injection of cash and at the same time benefiting from the use of that asset.
Factoring is considered as a fast way of acquiring working capital. Factoring involves a lender or a factoring company advancing cash to a business, this cash is usually a certain percentage based on the invoice value. Industry statistics currently state the going percentage for the initial advance in a factoring agreement is now about 80%. Factoring requires customers to submit payments directly to the factoring company.
A line of credit is another alternative source of working capital. What a line of credit does to a business especially one with recurring expenses is, being able to access funds from a bank whenever the need arises without necessarily taking a loan.
The most common source of working capital is the timely preparation of invoices and billing customers, who more often than not pay within a reasonable time. It’s through such a constant source of cash flow which provides businesses with the required working capital. In pursuit of better working capital management policies, companies come to the realization that there is need to continuously seek and secure alternative sources of working capital. The various sources of working capital available make it possible for a business to continue with its day to day operations without disruptions. EMerchantBroker a third party financial advisor offers programs that in case of emergencies can get a business working in 5 days or less.