Working capital is the money a company needs to cover its day-to-day operating expenses. This includes expenses such as rent, utilities, inventory, payroll, and other expenses that are essential to the smooth operation of a business. Working capital is important because it ensures that a business can meet its financial obligations on time, maintain cash flow, and continue operating without disruption.
There are several factors that affect a company’s working capital, including its industry, size, and business model. For example, a manufacturing company that produces goods may require a larger amount of working capital to cover its inventory costs, while a service-based business may have lower inventory costs but higher payroll expenses.
Working capital can be calculated by subtracting a company’s current liabilities from its current assets. The resulting number is known as the company’s working capital. If a company has a positive working capital, it means that it has enough funds to cover its short-term obligations. If a company has a negative working capital, it means that it may struggle to meet its operational and financial obligations in the short-term.
Many companies fail not because they are unprofitable, but because they run out of cash. A company can be highly profitable, but if it does not have sufficient cash on hand to meet its obligations, it can quickly run into trouble. In such cases, working capital financing can provide the necessary funds to keep the company’s operations going, even when cash flow is tight.
There are several sources of working capital financing that companies can turn to which include:
1) Bank loans:
One of the most common sources of working capital financing is bank loans. Banks offer various types of loans such as overdrafts, lines of credit, and term loans to businesses. These loans can be secured or unsecured, and the interest rates and repayment terms depend on the creditworthiness of the borrower. Bank loans can provide businesses with the required liquidity to meet their short-term financial needs.
2) NBFC loans:
NBFCs provide a convenient and flexible option for businesses to finance their working capital requirements. Businesses can choose from a range of loans provided by NBFCs that suit their requirements. These loans can be secured and unsecured.
3) Trade credit:
Trade credit refers to the credit extended by suppliers to businesses. It is a common source of working capital financing, especially for businesses that have a good payment history and a long-standing relationship with their suppliers. Trade credit can help businesses to manage their cash flow by allowing them to defer payments to their suppliers.
Factoring is a financing technique in which a business sells its accounts receivable to a third party, known as a factor, at a discount. The factor then collects the payments from the customers on behalf of the business. Factoring can provide businesses with immediate cash flow and reduce the risk of bad debts.
5) Invoice financing:
Invoice financing is similar to factoring, but the business retains control over its accounts receivable. In invoice financing, a lender advances funds to the business against its outstanding invoices. The lender then collects the payments from the customers on behalf of the business. Invoice financing can provide businesses with the required liquidity to meet their short-term financial needs
Hence, working capital is essential to the financial health of a business. It ensures that a business can meet its financial obligations on time, maintain cash flow, and continue operating without disruption. There are several types of working capital financing options available to businesses, each with its own advantages and disadvantages. It is important for businesses to carefully consider their financing options and choose the one that best fits their needs.
About Red Fort Capital
Red Fort Capital NBFC has its own credit evaluation system to check the borrower’s credibility in a holistic approach, which helps it provide business loans of Rs. 1-10 crore in a record time of just 7 days. This is why it is one of the best NBFCs for MSMEs to secure quick capital. With a strong investment portfolio, the company believes in quick deal closure, pragmatic returns, and long-term partnerships. It has a wide range of deal portfolio from a financing logistics company to D2C black water brand, Red Fort capital is actively funding time-sensitive opportunities and supporting Micro, Small and Medium Enterprises in their growth journey. Therefore, it is a reliable NBFC that has been financing growth-oriented credit to businesses.