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Working capital finance: what is it and how to apply

By Contributor, Mon 12 Apr 2021

We all know that business lives and dies on cash flow. Poor financial management can lead to the failure of 46% of businesses, so says ASIC. Taking out long-term loans to cover short-term liabilities is often a recipe for disaster.

Instead of making that critical mistake, working capital finance can help uncork the bottleneck many businesses face – inadequate cash flow – without causing headaches later down the line.

What is working capital finance?

Working capital finance is a type of unsecured (in other words, not tied to an asset or collateral) business loan that finances a company’s day to day operations.

Businesses cannot use working capital finance to purchase long-term assets such as cars, equipment, property, or other investments. Working capital finance is used to cover short-term operational requirements such as payroll, just-in-time inventory, and urgent expenses. 

Working capital finance may come in the form of a term loan, a business line of credit, or invoice financing, so says the ASBFEO. There are many types of working capital finance available to business – it’s all about using the finance to suit your cash flow requirements. The type of working capital discussed here is known as a term loan as it has fixed interest over a fixed term.

How to use working capital finance effectively

Many businesses are seasonal in nature, with sales cycles fluctuating throughout the year. Tourism operators, for example, may see high cash flow during the summer months while the winter months are leaner (or they may even be closed.)

Manufacturers may have consistent production throughout three quarters of the year to fulfill orders for a fourth quarter surge – but in the meantime, they still have to pay wages, rent, suppliers, stock purchases, capital projects, refurbishments, small equipment purchases, and other operational expenses. 

Sometimes demand outstrips your capacity to supply, and a working capital finance loan helps maintain that supply prior to getting the revenue from sales of your product. It helps you make the most out of the opportunity.

Working capital finance helps bridge those gaps between the leaner months and the “boom” times, upon which cash flow equalises and the loan or line of credit can be repaid in full (or near enough to it). 

Applying for working capital finance

Applying for and obtaining working capital finance is relatively easy, as business finance expert and Savvy managing director Bill Tsouvalas explains.

“The biggest advantage to working capital finance is that it’s nearly instantaneous and aids businesses in maintaining cash flow through a trying business cycle or the inevitable quiet period before higher sales and cash comes in.

"Most working capital finance options are unsecured and don’t require collateral. Your business can borrow from $5,000 up to $1 million or more depending on your circumstances, and funds are deposited directly into your business bank account.”

Businesses can apply online, as long as they supply an ABN, mobile, and 100 points of ID, as well as financial info such as bank statements. Loan terms can vary from 1 to 7 years and may also be available under the SME Guarantee Scheme. 

Is my business eligible?

At the bare minimum, your business must be registered in Australia and meet the turnover requirements set by the lender. They must meet the minimum operating terms your lender requires and demonstrate an ability to make your repayments under the agreed terms. 

What if I need more?

Tsouvalas says that some business, depending on their credit rating, may access additional funds using a redraw facility after a certain period.

“Some businesses need to draw down on their loan if disaster strikes, for example,” he says.

“Working capital finance works on the premise that once all the kinks in cash flow are ironed out, the business will be in a more secure position to service the loan. This depends on the lender, however. A broker will have access to multiple lenders so you can select a loan with exactly this facility.”

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