Getting working capital

Working capital is probably the most basic building block of any enterprise. So fundamental and essential is it, in fact, that the BBC includes a teenager’s guide to working capital in its broadcast GCSE course in Business Studies.

In short, working capital keeps any business solvent by ensuring that its short-term debts are met when they fall due.

Adequate working capital, therefore, is essential for:

• paying the salaries and wages of staff;

• settling debts – on pain of legal action being taken by creditors; and

• taking advantage of any discounts offered on the prompt payment of the company’s bills.

So, where might you turn if the company has insufficient working capital?

Sources of funding

There are three main sources of funding for your working capital:

• retained revenue – which comes from your day to day trading activities;

• investment in your company – which may take the form of equity funding; and

• borrowing – also known as debt funding.

Borrowing to fund your working capital

All there are many variants, borrowing may take one of two principal forms:

Secured borrowing

• this is typically reserved for borrowing relatively large sums over a longer-term;

• it might be used to acquire your business premises or headquarters and essential plant and machinery, for example;

• just as the term suggests, secured borrowing requires the security of company assets against repayment of the loan – and these remain at risk until the final repayment of the loan has been made;

• because of the need to obtain security, the size of the loan and the length of time over which it is to be repaid, secured borrowing may require you to produce a detailed buisness plan and cashflow projections;

• this all takes time to arrange, and satisfaction of your need for additional working capital may be dangerously delayed;

Unsecured loans

• the immediate demand for additional working capital may be better met by unsecured, fixed rate, short-term business loans;

• the amount of borrowing required may be relatively modest – although sums of up to £100,000 may be available from lenders, companies typically need £50,000 or less of this type of business loan;

• borrowing may be tailored to meet your immediate needs, and repayment terms typically extend for up to 12 months – although the shorter the period you choose, of course, the less the cost of credit;

• enhancing your working capital in this way puts none of the company’s assets at risk since the loan is unsecured;

• an approval in principle for such an unsecured, fixed rate, short-term loan may be given more or less immediately by some lenders;

• following consideration of your formal application, a decision on whether to grant the loan may be given, and the requested funds may then be transferred directly to your company bank account within a matter of days.

Recognising the critical important of sufficient working capital for your company and the need to address any shortfall quickly and with the minimum of time, effort and cost, therefore, you may want to consider an application for such a business loan – especially since applications may be made immediately online.