Working Capital

The traditional form of working capital finance is through a Bank Overdraft facility. This is essentially a Business Account that can be used for day to day transactions and can be drawn down to a predetermined negative balance without the bank’s consent. If the balance is drawn beyond that limit, the bank may or may not honour the withdrawal and may charge fees and penalty interest.

Overdrafts should be fully fluctuating and should only be used to accommodate the low point in the business’s cash flow cycle. If the overdraft balance ceases to fluctuate in full and remains at a level near its limit, this is considered to be “core” debt and should be refinanced to a term loan facility.

Other forms of working capital finance include Debtor Finance, also known as Invoice Finance or Factoring, and Inventory Finance.

Debtor Finance involves borrowing money against the value of your debtor book. A financier will generally lend you up to 85% of the value of each qualifying debtor and charge a fee / interest for doing so. There are different ways of working Debtor Finance. In some cases, the borrower will retain the relationship with their customer and the lender merely extends funds against the value of the invoices outstanding. The borrower repays the lender once the invoice is paid to them. In other cases, the invoice is passed on to the lender and the lender chases the customer for payment. In this case, up to 85% of the invoice value is extended to the borrower up front, with the balance of the invoice paid to the borrower once collected by the lender (less a fee / interest of course).

Debtor Finance can be a good way to speed up the cash flow cycle of a business. Funds can be received within a couple of days of invoicing a client rather 30 or 60 day terms as are typical in business. Debtor Finance can also save the borrower money by eliminating the need to offer discounts for early payment of invoices and also allowing the borrower to take advantage of discounts offered by their suppliers for early settlement of accounts.

Inventory Finance is borrowing money against the value of a business’s stock. This type of facility is normally used by businesses purchasing large and relatively expensive items of stock such as car dealerships, farm equipment retailers, motorcycle dealerships etc. It can also be used for less common stock such as grain inventory stored on a farmer’s farm. The dollar value of this type of facility is linked to your stock levels and therefore can be flexible during growth periods allowing the borrower to take advantage of the higher demand for their stock without being limited by a fixed dollar amount such as is the case with an overdraft. This can be helpful for businesses which experience seasonal fluctuations in demand. Inventory finance also allows the borrower to pay their suppliers immediately, therefore taking advantage of any trade discounts offered for early payment and giving them the ability to negotiate better terms.