Working capital refers to the funds needed by a business to conduct its daily operations, such as payment of wages, purchase of raw material, covering overhead costs and offering credit services. Working capital can be subdivided into two areas: regular working capital that provides a steady base for overall business objectives; and short-term working capital used to facilitate the day-to-day business operations. Sources of finance for working capital include bank loans, retained earnings, credit from suppliers, long-term loans from financial institutions, or proceeds from sale of assets.
A loan is the amount of money that is given to an individual or a company on the agreement they will repay the amount borrowed in a period that exceeds 12 months and at predetermined interest rates. Long-term loans are usually secured against certain assets and are offered by commercial banks, the government and financial institutions. This type of loan provides the long-term working capital for the business.
Short-term loans are loans that are to be repaid within a year from the time they are borrowed. Savings banks, cooperatives and the government through the Small Business Administration are some of the institutions that offer these loans. Bank overdraft is one such source of business finance. A bank overdraft is a withdrawal made by a business that exceeds the amount of balance in its bank account, although the amount of money does not exceed a set limit.
Line of Credit
This is a form of a loan agreement between the bank and the borrower that enables the borrower to acquire some amount of the funds on demand, but the borrower does not have to take the loan. A business may secure working capital through this service if it has recurring expenses at regular intervals.
This credit service offered by suppliers allows businesses to get goods and pay for them later. This is a source of working capital that may be acquired from all suppliers depending on the business arrangements, the type of business you conduct and the worth of the credit to be offered.
A business may use its assets to secure working capital from financial institutions that offer asset based loans. The asset includes machinery, vehicle or accounts receivable. Accounts receivable are financial documents of people or companies that owe money to the business and they may be traded in to finance working capital at discounting companies.
These loans are secured with the business` inventory acting as the security. Finance for working capital may be acquired through its inventory although the business cannot sell it until the loan is repaid because the lender has the right to the inventory until the loan has been repaid.
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