Short term working capital is required for the operation of the business. There are many ways through which you can finance your business during critical moments. Before borrowing, it is better to compare the options available.
You have a business and you want short term working capital but you don’t know where and how to source it from? Business is full of uncertainties. Risks may occur in your business any time that require finances.
Four Sources of 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 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. Here,
the mercantile credit plays a great role in boosting your business transactions. You sell the goods on credit and your customers accounts are debited with the same amounts.
On the basis of your customer’s accounts receivables, you are 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.
Two types of Receivable Financing
1. Ordinary Account Receivable Financing or Non Notification
This is a system of short term financing. 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. Your customers are not intimated with this arrangement.
2. 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 is an agreement between you and the factor. The factor pays you money against your customer’s debts.
Five Differences Between Non Notification and Factoring
1. Factoring assumes liability of bad debts while in non notification the seller is responsible for any bad debts.
2. Factoring is responsible for the collection of bad debts while in non notification the seller is responsible for collecting them.
3. Factoring forwards the invoices to your customers while in non notification the seller is the one sending the invoices to customers.
4. In factoring the customer is informed while in non notification the customer is not intimated.
5. Factoring is notification of accounts receivables financing while ordinary account receivable is non-notification of account receivable financing.
