Understanding Working Capital Financing
Finance is the science or art of working with money, or money management. If you own your own business, chances are you are either handling your own accounts, have an accountant in your office, or contract the work out. Working capital financing helps your business to grow. Read on to learn more.
Before you can understand the importance of working capital financing, you’ll first need to understand what working capital is. It is the money that a company has to work with in a given year. You figure this out by calculating the difference between your liabilities and assets. Liabilities are simply the regular bills you have to pay to maintain your business, such as rent and utilities. There are also accounts you need to pay for specific jobs. The things you spend money on, such as the invoices you receive for products or services, are also considered liabilities. Assets are what you have that brings in money or will potentially bring in money. If your business is failing, the industry term used is “in the red.” This means that after calculating your working capital for the year you come up with a negative number. “In the black” means you are maintaining a level of profit for your company.
Of course, it’s more complicated than that when calculating your working capital in order to apply for working capital financing. You have to take into consideration the total value of all your current payment obligations, including employee wages, against the value of your current assets and what you have in the bank today. When looking at an entire year of business, what you want to see is profit -- that you’re making enough money to grow your business. You have made the investment in a new product, i.e. paid for the product to be manufactured. This cost would be considered a liability. The value of the product exceeds the cost of the product. What you would have as an asset would be your potential income when you sell that product.
If you are looking to grow your business, simply making a profit on your investment is going to help you grow at the speed you’re looking for. There are two kinds of working capital financing: debt financing and equity financing.
Debt financing is essentially taking out a business loan. Like any other loan, you receive a lump sum of money that you pay back over time with interest charged on the original loan amount. Whether you’re opening up a new business or growing your current business, the extra money to work with will give you the chance to earn a greater profit, making it easy to also pay off your business loan.
Equity financing is different in that you’re not borrowing money, you’re asking for people to privately invest in your company and offering them a stake in the business in return. By offering stock in the company, the benefit for your financiers is profit sharing and it’s usually done on a percentage-based contract.
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Working capital financing can be a great benefit to your small business. To learn more about this type of financing, visit: http://www.receivablesxchange.com/