Working Capital Finance Sources Explained

For any business entity, big or small, securing adequate funds or working capital finance is critical for the smooth functioning, maintaining daily operations and expansion. Business owners can use different working capital finance sources to meet their short-term and long-term capital needs.

As a business owner, having a good understanding of these working capital finance sources, i.e., availing a loan from a bank or an NBFC (non-banking financial company) to other financing options, is essential for sustained business management and effective financial management.

This guide closely examines working capital sources' different long-term and short-term financing. But first, let us know what working capital finance is.

What is working capital finance?

Working capital finance is essentially the money or funds the business owners use to manage the day-to-day operations, covering operational expenses, purchasing inventory or raw materials, and meeting their liabilities.

This type of finance helps businesses manage the short-term cash flow rather than use it for long-term investments or buying a new asset. It also gives the businesses the financial freedom to meet the different business expenses without digging into the cash reserve.

Sources of working capital finance

Working capital finance sources can be of two types – long-term and short-term.

Long-term working capital finance sources

Generally, business owners seek long-term working capital finance through different sources for business growth and expansion. Here are some different ways to get long-term working capital finance.

• Equity Finance

  This is among the most popular ways business owners raise working capital finance. Under this type of finance, the businesses sell the company’s equity or ownership to the investors solely to raise funds. The success of equity financing depends on various factors, like the company's perceived growth potential, the organisation’s reputation and credibility, and others.

  
  

  Another important aspect to know about equity financing is that when businesses raise funds, they can bring business veterans on board as directors or equity owners of the company. This benefits businesses from their sharp business acumen and innovative strategies and fosters exponential growth.

  
  

• Long-term business loans

  A business loan is one of the preferred ways of getting working capital finance among several businesses in India, especially MSMEs. Today, many NBFCs like Udyog Plus, part of Aditya Birla Finance Limited, offer various business loan solutions at attractive interest rates, with a simple documentation process and flexible repayment terms.

  
  

  Also, they have minimum eligibility criteria, allowing all kinds of businesses and even self-employed professionals to obtain the funds they need for their business. This type of long-term working capital loan is the go-to option for many businesses because they extend an extended repayment term, allowing them to easily repay the amount without compromising on their business goals.

  
  

• Debentures

  Issuing debenture is another long-term working capital finance source. In this method, the business organisation issues debentures to raise funds from the general public, other companies and investors.

  
  

  Unlike issuing stocks or shares, while issuing debentures, the company has to declare the interest payable beforehand. The obligation to pay interest to the investors remains binding even if the funds raised remain unutilised or the business runs into a loss.

  
  

Short-term working capital finance sources

Short-term working capital finance sources can be external or internal. Businesses seek working capital finance for the short term to meet any immediate financial expense, overcome an emergency, address the temporary shortfall of cash, or maintain regular operations. Here are some of the different ways you can get short-term working capital finance.

• Short-term business loan

  Many businesses, especially SMEs (small and medium enterprises), prefer applying for a short-term business loan to meet short-term capital finance requirements. Today, many NBFCs like Udyog Plus offer business loans at affordable interest rates, making it a convenient choice.

  
  

  Additionally, the quick online application and approval process allows businesses to get funds immediately and provides a hassle-free borrowing experience.

  
  

• Overdraft

  Nowadays, many financial organisations in India offer an over-draft facility to business owners who hold a current account with them. In this method, the businesses can withdraw more money than the funds they hold in their current account and then repay the same within a specific period, along with the interest levied by the lender.

  
  

  Since financial organisations levy interest only on the amount utilised, it is considered one of the most cost-effective ways to get working capital finance for short-term needs. Financial organisations extend the overdraft facility and set a specific limit on the amount the business owner can withdraw based on their creditworthiness.

  
  

• Customer advances

  Getting advance payments from customers is another effective way for businesses to secure working capital finance for short-term needs. Typically, the businesses insist on advance payments for bulk orders, which allows them to get the funds and maintain sufficient cash flow in the organisation.

  
  

  A significant advantage of raising funds through this method is that the businesses need not pay any interest on the cash advance and yet meet their operational expenses.

Conclusion

As a business owner, you would surely face a situation where you may seek to raise working capital finance from external sources. So, having a good understanding of how you can get the desired funds is paramount to choosing the right method that aligns with your business needs and long-term business financial goals.

So, when looking for ways to raise funds for your business, do your due diligence, assess the pros and cons of different methods and choose the right method accordingly.