Working Capital Financing


In this piece, we are going focus on working capital financing. In many of our previous discussions, we have not touched upon the issues pertaining to this specific type of debt capital facility. Working capital financing is one of the most difficult aspects of obtaining capital for your business. This is primarily due to the fact that working capital is primarily considered to be an unsecured form of financing that you can use to finance your ongoing operations of your business. Specifically, in this discussion, we'll focus on how you can appropriately obtaining working capital financing for your business and businesses that are best suited for this type of funding. In today's economic climate as well as the credit granting climate the acquisition of working capital financing, usually in the form of a business line of credit, is very difficult to obtain. Again, this lends to the concept that working capital financing is not typically secured not by collateral rather through the ongoing cash flow that is generated by your business. As such, the businesses that are best suited for working capital financing of all of those companies that are very well established and have a clear operating history as it pertains to their cash flow or a professional service businesses that generates a substantial amount of accounts receivable by rendering the professional services that are offered by the individual practitioner. As working capital financing is typically considered to be an unsecured business loan, and as such it is imperative that you clearly showcase to any potential lender how you intend to use as working capital as it relates to your business operations.

 

The best businesses of suited for working capital financing are professional service practices. These types of businesses include medical practices, law practices, accounting practices, and other professional service businesses that render specific advice or services to general public. In regards to professional practices, especially if you are a medically focused practice, working capital financing may be very easily obtained by securing this type of financing through your ongoing accounts receivable. Again, speaking directly to the medical community, your medical practice or related allied health care practice – you are able to bill in private insurance companies, Medicare, Medicaid and you are in an excellent position to receive working capital financing as the income that is generated through these accounts receivables are sure to be paid as time progresses. Typically, a working capital financing facility takes a three month period as to how much money you receive from your receivables over this time frame. As such, traditional lending institutions including banks and finance companies will extend you a line of credit that is typically equal to that there was a generate over a three month period. If you are establishing a new professional services practice, and you have the appropriate educational credentials in place, then you may also qualify for a working capital financing facility simply due to the fact that the bank or financial institution that is assisting in creating new this type of business on the credit will your business as a less risky investments as you progress through your private practice operations. Outside of professional practices, businesses that are best suited for working capital financing of those types of companies that generate recurring streams of revenue. For example, and as we discussed in one of our previous articles, one of the best types of businesses that is able to receive working capital financing is an IT consulting firm. This is because many of these firms operate on an ongoing contractual basis to generate a highly workload ensuring of income for the services that they render to the general public as well as the business public. If you are able to effectively showcase to a financial institution that your business generates recording streams of income, outside of operating a professional practice, you are in an excellent position for receiving working capital financing. This is especially true among service businesses that do not require a tremendous amount capital, but do require a substantial amount of financing in order to pay bills prior to receiving income from clients.

 

As with any type of unsecured credit facility, working capital financing typically carries a higher interest rate than a traditional business loan that is collateralized by business assets as well as personal assets that have been pledged as collateral for the specific type of funding that you're seeking. There are a number of specialized companies that operate within the United States that provide working capital financing based on your accounts receivables. For service businesses that continually render professional services as well as services that generate recurring shoes of revenue for ongoing invoices to your customers may actually serve as the collateral is needed for your working capital facility. Sometimes these firms are referred to as factoring companies. It should be noted, immediately, but there is a substantial difference between obtaining a business line of credit as a working capital facility versus working with a factoring firm. In the

 

We are going to discuss the difference between working with a factoring company versus obtaining a business line of credit that serves to provide you with the working capital that you need.

 

The factoring companies, unlike firms that grant working capital financing facilities, directly purchase your receivables with the intent to call back from your customers on a monthly basis. For instance, if the individual firm owes you $1000 as a receivable for services rendered then a factoring company will purchase at receivable from you at a substantial discount. In most cases, the factoring company will typically provide you with $.60-$.80 on the dollar for acquiring the invoice that you have provided to one of your clients. Once the client pays you for the services that are rendered you'll receive only 60% to 80% of the financing that was provided to you by the factoring company because they have taken the risk that in the event that your client does not pay you will still be able to receive the financing that you required by the factoring company. In the case of a working capital financing facility you are able to have a line of credit that is based on the ongoing receivables that you receive from your clients. However, you are still fully responsible for the amount of money that you have drawn down on your working capital business line of credit even if your client does not pay you. This is the primary difference between working capital financing and working with a factoring company. In many of our future discussions will focus on working with factoring companies and how they can assist you with providing the financing you need to currently shifting the risk as it pertains to clients not pay their invoices to third-party companies. However, working with a factoring company, rather than a company that provides you with a working capital financing line of credit, the anticipate that the margins that you receive will be much lower due to the fact that you are selling an asset to a third party rather than hypothecating and assets to third-party with the intent to receive a working capital line of credit.

 

As it relates to our continued discussions as it pertains to the expenses related to working capital financing facilities, secured loans, unsecured business loans quickly continue to focus on the costs that are associated with these individual types of funding. Again, and as we cannot state this enough, if you are uncertain as to what the anticipated costs are for any specific type of financing them strongly recommend that you work with a business consultant, but financing consultant, certified financial planner, or certified public accountant that can further assist you in understanding what expensive be required as you progress to your business operations as it relates to interest financing and upfront fees for specific types of credit facilities. In doing so, you'll save yourself a tremendous amount of heartache, headache, and hassle as it relates to receiving the financing they need to develop, expand, or launch your entrepreneurial venture.

 

Traditional working capital financing typically comes in the form of a business line of credit that is continually drawn down and repaid over a significant time frame. For most working capital financing credit facilities, the term of this financing usually ranges from one year to 10 years depending on the stability of the business and depending on the type of business that you operate.

 

Again, working capital financing is one of the most difficult forms of financing to obtain simply because, in most instances, be collateral that is used to secure this type of funding is not considered to be a tangible asset. Again, one of things is are often done by companies that need ongoing work working capital financing is to work with factoring companies that directly purchase the accounts receivable of your business. However you are taking an extremely expensive hit to your bottom line by working with a factoring company. That's businesses, again, harder this for working capital financing are service-based companies that do not have a tremendous amount of overhead for the able to render professional services that are secured by private insurance companies, Medicare, and Medicaid. As such, we recommend that you focus on the issues pertaining to your cash flow needs as you progress through your activities in regards to securing working capital financing. Time and time again, we've seen a number of entrepreneurs take out large business lines of credit with the intent to use it as working capital and to find that the costs associated with this type of financing drastically exceed what they are able to afford. As with any type of credit facility, you should always make sure that the financing that you're seeking is affordable to your company not only in the sense that you have to pay in interest rate on the front to your borrowed but also in the sense that you have to focus on the principal repayment periods that you will come across as you obtain a working capital financing.

 

As with any type of business loan or other credit facility, you most likely need to have a very well prepared business plan in place in order to receive the financing you're seeking. This is especially true for companies that require working capital financing as banks want to see exactly how you intend to manage your cash flow on an ongoing basis and how much of the line of credit that they will extend to you will be drawn down over a three month and six month period. As such, having a very well-developed pattern of your cash flow analysis will in short your business is able to effectively receive the working capital financing credit that is required in order to finance your ongoing business operations. This is especially true if you do operate a professional practice for a company that generates record streams of revenue to the ongoing invoices to clients on a month-to-month basis. If you are able to do this effectively they will be in much better position to acquire a working capital financing for the ongoing receivables that you generate through your work rendering of services to the general public as well as the business public. Furthermore, when securing working capital financing facilities, you should clearly delineate any potential lender how you receive your income through your client base. Again, the businesses that are best suited for working capital financing are those that generate a substantial amount of invoices from companies that pay you on the ongoing basis or from your professional practice activities.

 

Companies that are usually not suited for working capital financing include retail stores, distributors, wholesalers, and other companies have focused on the distribution of products to the general public for the business public. Rather than focusing on working capital financing for your business if you tend to operate within one of these arenas and you may want to focus on inventory line of credit is secured by the products that you sell to the general public. In many of our next discussions, we are going to focus on the differentiation of obtaining a working capital financing facility forces and inventory business line of credit. Again, banks, due to the current economic and credit environment, are far more willing to provide lines of credit that worked a working capital facility to businesses that are able to appropriately secure the capital that you need if there is a substantial amount of collateral in place. Time and time again, will continue to focus on how you can effectively develop a business plan and a collateral plan that very clearly showcases to the potential lender why you are not only a good credit risk but also why banks will lend to you based on the collateral that you intend to purchase with the financing that you receive.

 

This is going to conclude our general article as it pertains to working capital financing. However, we will continue to touch upon a number of different subjects as it relates to the ongoing capital needs of your business, especially as it were pertains to general capital. We recommend that you continually review our articles as it pertains to working capital financing, accounts receivable factoring, accounts receivable financing, and other forms of finance are available to you as required in order to expand and develop your entrepreneurial venture.

 

Thank you again for tuning in to our articles that have entertained and developed through TheFinanceResource.com and we will continue to provide you with new and insightful information as it relates to the ongoing cash flow needs of your business via working capital financing facilities.


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