The Beginner’s Guide to Working Capital Financing

Estimated read time 3 min read

Running a business requires capital. Regardless of what goods or services you intend to sell, you’ll need to secure capital. Research shows that small businesses spend around $40,000 during their first year of operations. With working capital financing, however, you can keep your business afloat. Working capital financing will provide you with the capital needed to run your business.

The Beginner’s Guide to Working Capital Financing

What Is Working Capital Financing?

Working capital financing is the acquisition of capital to cover day-to-day operational expenses. All businesses have operational expenses. Working capital represents the total amount of cash a business has on hand to cover these expenses.

If your business is low on working capital, you may struggle to cover its operational expenses. And failure to pay for these day-to-day expenses can jeopardize your business’s success. Working capital financing, though, can increase your business’s working capital.

How to Calculate Working Capital

You can calculate working capital by taking your business’s current assets and subtracting your business’s current liabilities from it. The end result is working capital — which is the total amount of cash your business has on hand to cover operational expenses. Working capital financing, on the other hand, is a form of business financing in which you acquire working capital from a lender.

Types of Working Capital Financing

What are the different types of working capital financing exactly? There are working capital loans. As the name suggests, working capital loans are debt-based financing vehicles that are designed to increase a business’s working capital. You can obtain them from banks as well as alternative lenders. Some working capital loans are secured, whereas others are unsecured. Regardless, all working capital loans involve borrowing money from a lender. You can use this borrowed money to cover your business’s operational expenses.

Factoring and accounts receivable financing are often used to increase working capital as well. Factoring involves the sale of unpaid invoices to a factoring company. The factoring company will pay you a fee for your business’s unpaid invoices, which you can use to cover operational expenses.

Accounts receivable financing is a specific type of secured loan. It involves borrowing money from a lender while using unpaid invoices as collateral. Accounts receivable financing and factoring are similar forms of financing. The difference is that accounts receivable financing is essentially a secured loan, whereas factoring is not.

This article was brought to you by Intrepid Private Capital Group, a Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.

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