Friday, June 18, 2010

How To Raise Short Term Working Capital For Your Business

You have a business and you want short term working capital but you don't know where and how to source it from? The world of business is full of uncertainties. Risks may occur in your business any time that requires finances. There are financial institutions that lend short term loans but before acquiring the loan from them, it's better to understand their payment terms and select the best that is compatible with your business.

Here are some sources that will finance you short term working capital:

1. Your own savings

You can get short term working capital from your own saving without the worry of paying any interest. But this amount may not be substantial enough to meet all the short term requirements of your business as it is usually small.

2. Apart Of the Long Term Borrowing

The long term loan you had borrowed can be used partly in financing your business short term requirements. Sometimes this amount may not be available as it's already fully utilized.

3. Bank Loans

Banks are the major lenders of money for short term periods. They lend loans for six months. This means that you have to pay them all their money plus a certain percentage of interest within the period of six months. You can obtain from them the secured or unsecured loans depending on your relationship with them. You may also take an overdraft or cash credit from your bank.

4. Accounts Receivable

It is the smartest way of raising short term working capital especially if your business is always selling goods on credit basis to its customers. Here, the mercantile credit plays a great role in boosting your business transactions.You will be selling goods and your customers accounts will be debited with the same amounts.
On the basis of your customer's accounts receivables, you will be able to get loans or advances from factors. When the money is received from the factors against these accounts, it's termed as receivables financing.

They are of two types:

A. Ordinary Account Receivable Financing/Non Notification/

This is a system of short term financing whereby you enter into an agreement with the financing institution which agrees either to purchase the non notification or advance you a certain amount of money against such non notification. For this service you have to pay the financial institution a certain percentage of money. Your customers will not be intimated with this arrangement.

B. Factoring

This is the arrangement whereby the factor buys accounts receivable [sundry debtors] of your business and assumes all the risk of non-payment. There will be an agreement between you and the factor. The factor will pay you money against your customer's debts. The factor will charge a certain percentage of money as fees for this service.

There are differences between non notification and factoring:

Factoring assumes liability of bad debts while in non notification the seller is responsible for any bad debts.

Factoring is full responsible for the collection of bad debts while in non notification the seller is responsible for collecting them.

Factoring will be forwarding invoices to your customers while in non notification the seller is the one sending them to customers.

In factoring the customer is informed while in non notification the customer is not intimated.

Factoring is notification of accounts receivables financing while ordinary account receivable is non-notification of account receivable financing.

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