Financing and Working Capital – 3 No Brainers for Businesses

27 June 2018


When it comes to running a business, balancing income with expenditure is something that just cannot go wrong. We spoke to James Sinclair at Trade Finance Global about the nuances of financing for businesses, and four tips to consider if you’re raising finance.

It’s important to remember that financing provides a common language for finance directors/business owners and owners of capital. Businesses need cash to help their business grow, manage the day to day flow of finance, and financiers seek returns on their money, clearly outlining the risks and returns they are willing to accept.

Generally speaking, there are two types of finance; finance from shareholders (equity finance) and finance from debt holders (debt finance).

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1. Assess your tied-up capital and make it work for you

It’s surprising how much working capital is tied up in stock. Many businesses sit on assets (be that machinery, equipment), receivables (unpaid invoices, money owed) and also money that is sitting in the bank account. Utilising cash flow within the business and making money flow more effectively around the business can help you reassess what repayments (interest, bonds) the business owes and ultimately save money. Taking on funding is an arduous task and should be considered carefully. We’d recommend asking yourself the following questions:

  • What will you be using the finance for?
  • When will you look to repay the finance?
  • How quickly do you need finance?
  • Do you have existing working capital in the balance sheet?
  • What are your current repayments and the current cost of capital?

It’s always advisable to work with brokers, finance professionals, accountants, and procurement teams to identify where pots of cash are sitting on the balance sheet, and creatively come up with solutions of freeing up cash to fund growth. As they say, cash is king!

2. How much are you owed in unpaid invoices?

Large end customers have a tendency of paying invoices late, which can be a huge drain on working capital.

A recent FundBox survey suggested some of the microeconomic impacts of late payments to SMEs and how this can significantly impact cash flow as well as many other factors:


Source: FundBox survey, n=200, processed by Trade Finance Global

Finance facilities such as invoice discounting and invoice factoring can help alleviate some of these issues by providing short term secured finance using these invoices as security to provide upfront cash for the business.

Smaller businesses without a large finance or payables function can rely on invoice factoring houses to take control of the company’s ledger and chase up clients on their behalf, whilst also providing a working capital injection into the business. In some cases, however, more confidential facilities (confidential invoice discounting) can be used in place of factoring where you still own the full client relationship whilst receiving finance on their unpaid invoices, less fees.

3. If you import or export goods, think about how you pay your suppliers

Many companies buy raw materials for construction finance projects, unfinished goods or products from overseas to then sell on to suppliers. These trade flows are important for global trade, but more importantly, can strain working capital if the company uses its balance sheet cash to pay for suppliers, resulting in 30 – 90 day payment gaps when end customers owe money.

Trade finance is an umbrella term for the financing of trade when exporting or importing goods both domestically and internationally. Normally the bank of a supplier and your company’s bank will work to secure finance over the stock being transported, guaranteeing payment to a supplier and also providing cash flow to that exporter so that the buyer and seller can do business with less risk.

To Conclude

When it comes to running a business, managing finances and the way cash flows through the company is crucial for success. In general, it’s always advisable to do as much research and ask as many questions as possible, whether you’re taking on a new supplier, customer, or raising debt or equity finance for growth. Growth comes with incredible opportunities around cost savings, entering new markets and increasing revenue streams, but also comes with risk, much of which can be mitigated with careful planning and understanding the details.

This article was written by Deepesh Patel from Trade Finance Global, who provide trade finance and invoice solutions for businesses to trade, import or export goods, both domestically and globally.


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