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Working capital is one of the key priorities for any business leader, say multinational consultants KPMG, who argue that its effective management may help to achieve efficiency, release cash for further investment in your business and enhance profitability.
Working capital is the engine which drives the growth and development of any business. It is the source of funding for the stock you buy, the supplies and materials you order, the equipment you use, the marketing campaigns you run, and the smoothing over of any shortfalls in cashflow.
Working capital may be critical to the success of any business – large or small – therefore, but where do you get it and how do you keep it topped up?
Sources of working capital – longer-term
Any business needs working capital from the get go. In setting up the business, that working capital may take the form of investment – from you personally or from others banking on the longer-term financial success or your business – or by way of debt finance and borrowing.
Investment by others invariably involves your sharing equity in your business, whilst long-term debt finance or borrowing typically requires loans secured against your business assets.
Further rounds of investment or secured loans may be necessary to top up the working capital available to your business as it reaches out to meet new challenges in its chosen marketplace.
Sources of working capital – shorter-term
But topping up the working capital that is necessary to meet the daily challenges of your business, or to help it take on the opportunities need to build and grow its success, might often call for more immediate, but shorter-term solutions.
Instead of the long-term commitment to the repayment of large, secured loans, your immediate working capital needs may be better met by unsecured, short-term, fixed rate borrowing.
Unsecured loans put none of your business assets at risk – although you are still going to make every effort, of course, to avoid defaulting on repayments.
Because they are typically short-term – no longer than, say 12 months – the management of repayments may be easier to control and the accumulation of large amounts of interest may be avoided.
Since these types of loan are also fixed rate, you know exactly how much the borrowing is costing – the cost of credit is known from the very start, so allowing you to plan for the repayment over a relatively short space of time, and stay on top of the many other demands made on your cashflow projections.
Unlike many other, more traditional lenders, modern-day balance sheet lenders make every effort to work with you and your business to ensure that any repayment plan matches other demands on your cashflow – the lenders themselves, after all, are entrepreneurs just like yourself.
It also means that you may benefit from greater flexibility in the management of any loan that is approved. In the normal course of events, for example, you may encounter difficulties in meeting a scheduled monthly repayment. Provided you keep the lender completely in the picture, however, flexibility may be shown by simply extending your repayment term by that additional month and imposing no financial penalty for the single missed payment.
Similarly, if you opt to repay this type of loan in advance, with some providers you may be able to do so without any financial penalty.