What are Common Sources of Working Capital?
The process of working capital management demands that companies create and cultivate various sources of this type of capital. Doing so helps to ensure that the day to day operations of the business can continue without any disruption that would threaten the task of producing goods or services for sale. There are actually several different sources of working capital that both large and small businesses will utilize when and as needed.
Of all sources of working capital, the returns generated by selling and billing customers is the most common. Invoices for goods and services sold are prepared and forwarded to clients, who in turn ideally pay those invoices within a reasonable period of time. This continuous cash flow provides the means for the business to continue producing its line of products, making it possible to meet consumer demands on an ongoing basis.
At times, other sources of working capital will be necessary to augment the generation of revenue through sales. One approach is to use what is known as a sales and leaseback strategy. Here, an asset that is not considered essential to the basic operation of the business is sold to a third party, typically for cash. At the same time, the terms of the agreement allow the company to lease that asset from the new owner, making it possible to continue using that asset for some purpose. With this plan, the business gets an infusion of cash while also retaining the ability to benefit from the use of that asset.
The use of corporate credit cards is also sometimes considered a source of working capital. With this application, the business makes use of the card to manage temporary shortfalls in cash flow. Companies that routinely experience seasonal upswings and downturns in sales sometimes go this route. Assuming that the rate of interest applied to the balance is reasonable, this approach means immediate access to the backup capital, without the need to arrange for any type of loan.
Some businesses do choose some type of lending situation as a source of working capital. This may include a short-term lending arrangement known as a micro loan. The balance is usually relatively small and is paid off in a matter of months. A business may also choose to go with a working capital line of credit, a move that provides many of the benefits of using a corporate credit card as a source of capital, but sometimes carries a lower rate of interest and more liberal repayment terms.
For businesses that need immediate return on their invoices, factoring is often a good option. With this source of working capital, a lender that is usually identified as a funding or factoring company advances the business a percentage of the face value of the invoices issued for a specific billing period. Often, that initial advance is in the range of 80%. Customers remit invoice payments directly to the factoring company rather than the business. As the invoices for a given period are retired, the factoring company issues a second payment to the business that covers the remainder of the face value of those invoices, less a small percentage that is retained as the fee for providing the service.
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