How working capital financing is important to the success of any business?
Working capital is the cash which is at hand with a business entity to meet the daily expenses. To find out the amount of working capital in a business, you should deduct the current liabilities from current assets. In short, working capital is a measurement of a company’s overall health which includes efficiency and also liquidity. Working capital is used to meet daily and monthly expenses like wages, salaries, overheads and other operating costs. Working capital can be used for these purposes only of it is positive. Positive working capital means your current assets are more than your current liabilities. There can be situations in a business when the current liability is more than current assets and this is called negative working capital or deficiency of working capital. For the smooth running and goodwill of the business entity, it is very important to maintain a positive working capital. There are businesses where maintaining a positive working capital can be challenging because of various factors.
Big business houses have got access to large capital resources like capital market, raising of bonds, debt financing and many other options to finance their working capital needs. But small business houses do not have access to these resources and invoice factoring is a major resource for them to raise working capital at the hour of need.
Invoice factoring is a process in which the business sells invoice due in future to a factor – which pays them money for that invoice today. Invoice factoring is fast and flexible. If you want to raise working capital to meet the expenses for the next three weeks you will have to factor invoices according to that requirement. Usually factor invoicing takes three to four days for processing, but there are companies where the process is faster because they have made the entire process of application and approval electronic. The invoice against which the working capital is raised must be due and payable within a maximum period of 90 days.