This article was originally created for Hayes Knight (now Nexia Auckland).
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There are a number of options available to fund working capital with varying degrees of costs. It is a good idea to review your business’s funding model from time to time to ensure that you are utilising the best funding tool for your given situation.
The most common funding option is a bank overdraft. This is a useful option to cover occasional shortfalls and we would recommend considering putting an overdraft facility in place. There is a monthly charge even if not utilised and if your bank account is constantly in overdraft there are cheaper options available.
Credit cards are a useful option for making purchases and can be utilised for short term funding. You should, however, ensure that the balance is fully paid when due as interest charges are generally high. If cashflow is an issue then one of the other funding options will be more appropriate.
If cashflow is relatively stable but you require a one-off increase in working capital a term loan is a good option. This will generally be the cheapest of the funding options available with regular repayments of interest and principal being required. The loan repayments affect the business’s cashflow and it is important the right repayment term is selected to ensure that repayments are sustainable.
Trade Finance facilities are useful for retailers or importers who have to pay for products at the time of order which is often months before the products are actually sold. The interest rates are lower than overdraft facilities and the timing of repayment can be aligned with when products are sold.
Factoring, or invoice finance is another option available but is usually quite expensive in the interest charged, transactions costs and in the compliance that is required by the provider.
Capital purchases are often made from the working capital pool which can severely impact the business’s cashflow. There are a number of choices when making capital purchases rather than utilising working capital such as a term loan, hire purchase or asset finance. The term of the loan can often be set to mirror the life of the asset purchased.
The preparation of a forecast to model the future cashflow of a business can greatly assist in identifying future cashflow issues and will often be a requirement when seeking funding. If you are experiencing cashflow issues, have any questions on the best funding option for your business, or require assistance in negotiating terms with your bank please contact one of the Hayes Knight team.