When you're looking for immediate financial aid with a bad credit history you could consider short term loans. A short term loan give a year or less for the borrower to pay back the loan successfully. These loans provide immediate financial aid with minimum paperwork to meet the borrower’s needs. Let’s discuss the benefits of short term loans.
When you're looking for immediate financial aid with a bad credit history you could consider short term loans. A short term loan give a year or less for the borrower to pay back the loan successfully. These loans provide immediate financial aid with minimum paperwork to meet the borrower’s needs. Let’s discuss the benefits of short term loans.
Trade Credit Insurance White Paper December 2008jlebendig
Get our most recent white paper...An Overview of Trade Credit Insurance here. Great reading, insightful and it will answer more of your questions. Don\'t have credit insurance yet? What are you waiting for? Contact me to discuss your options for protecting your company.
Approaching Your BankerTips1. Keep in mind tha.docxrossskuddershamus
Approaching Your Banker
Tips
1. Keep in mind that to stay in business banks need to make loans.
Do not be afraid to ask for one. That is what the Commercial Account Manager wants you to do. To increase your chances of getting a loan, look for a bank that is familiar with your industry and who has done business with companies like yours. Seek out banks that are active in small business financing. Some banks lend on a conventional basis (lending money without government support), while some banks participate in government programs (in the form of government participations involving direct government funds or loan guarantees). However, be aware that banks often demand stiff collateral requirements for start-ups.
2. As an entrepreneur, make sure that you are thoroughly prepared when you go to your banker's office to request a loan.
You need to show your bankers that a loan to you is a low-risk proposition. Have on hand a completed Business PlanManagementMarketsMaterialsMoney Copies of cash flow (12Mth) Financial statement projections (3-4yrs)
3. Learn to anticipate every question that he or she has. Remember, the combination of information and preparation is the most powerful negotiating tool in the world. A confident and thoroughly prepared borrower is four times more likely to have his or her loan approved than a borrower who does not know the answer to some of the basic questions a banker asks. To show the extent of your preparedness, your business plan should also include answers to your banker's questions.
These questions normally are:
How much money do you need? Be as exact as possible; although adding a little extra for contingencies will not hurt. How long do you need it for? Be prepared to go into detail about what the money will do for you and why your business is a good risk. What are you going to use it for? Businesses use loans for three things: to buy new assets, pay off old debts, or pay for operating expenses. When and how you will repay for it? Your cash flow projections should provide a repayment time frame. Convince the banker of the long-term profitability of your business and your ability to repay the loan by using your financial projections and business plan. What will you do if you do not get the loan? Is your request Safe and Sound.
4. Do not take an apologetic and negative attitude. Keep your negativity in check. Present yourself as an entrepreneur who can and will repay the loan. Boost your image by providing your Commercial Account Manager with any promotional materials about your business, such as brochures, ads, articles, press releases, etc.
5. Dress in a professional manner for the interview. This is a business transaction, so treat it as such.
6. Do not stretch the truth in your loan application. Broad, unsubstantiated statements should be avoided. The lender can easily check many of the facts on your application. If you cannot support statements with solid data, then don't make them.
One of the major issues in the company is the controlling of the collection period and developing optimum credit policy that minimizing the company loses, i.e how to trade off and balance between two costs, the first is carrying costs and the second is the opportunity costs of a particular credit policy. In other wards to define the point where the total credit cost is minimized.
One of the oldest forms of business financing, factoring is the cash-management tool of choice for many companies. Factoring is very common in certain industries, such as the clothing industry, where long receivables are part of the business cycle.
Alternative Structures- PO Financing, Factoring & MCA (Series: Business Borro...Financial Poise
Purchase-order financing (P/O financing) is a type of asset-based loan designed to extend credit to a company that needs cash quickly, to fill a customer order. A company may operate with such a small amount of working capital that it cannot afford to pay the cost of producing a customer’s order. P/O financing enables such a company to not turn away business, by borrowing from a lender using the purchase order itself as collateral to support a loan.
Factoring is one of the oldest forms of business financing. Note that the term is “financing” rather than “loan” because factoring is not actually a loan. In a typical factoring arrangement, the company needing financing makes a sale, delivers the product or service and generates an invoice. The factor (the funding source) then purchases the right to collect on that invoice by agreeing to pay the company in need of financing the amount of the invoice minus a discount.
MCA lending is, in summary, an advance on a company’s sales. Financing through a merchant cash advance (MCA) is used mostly by companies that accept credit and debit cards for most of their sales, typically retailers and restaurants. The concept is this: funder purchases a portion of the company’s future credit card receivables for a discounted lump sum. The MCA funder receives the purchased credit card receivables as they are generated either by taking a percentage of the company’s daily credit card proceeds or by debiting a certain amount of funds from the company’s bank account. Depending on the risk profile of the company, it can be a more expensive form of financing for a business compared to other types of financing.
What these three things have in common is that they are each a type of “alternative lending.” Alternative to what? To the type of loan a company can get from a “regulated” commercial bank. This webinar explains these types of financing arrangements, what to consider before entering into them, and provides some tips on how to negotiate them.
To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/alternative-structures-po-financing-factoring-mca-2020/
Alternative Structures - PO Financing, Factoring & MCA (Series: Business Borr...Financial Poise
Purchase-order financing (P/O financing) is a type of asset-based loan designed to extend credit to a company that needs cash quickly, to fill a customer order. A company may operate with such a small amount of working capital that it cannot afford to pay the cost of producing a customer’s order. P/O financing enables such a company to not turn away business, by borrowing from a lender using the purchase order itself as collateral to support a loan.
Factoring is one of the oldest forms of business financing. Note that the term is “financing” rather than “loan” because factoring is not actually a loan. In a typical factoring arrangement, the company needing financing makes a sale, delivers the product or service and generates an invoice. The factor (the funding source) then purchases the right to collect on that invoice by agreeing to pay the company in need of financing the amount of the invoice minus a discount.
MCA lending is, in summary, an advance on a company’s sales. Financing through a merchant cash advance (MCA) is used mostly by companies that accept credit and debit cards for most of their sales, typically retailers and restaurants. The concept is this: funder purchases a portion of the company’s future credit card receivables for a discounted lump sum. The MCA funder receives the purchased credit card receivables as they are generated either by taking a percentage of the company’s daily credit card proceeds or by debiting a certain amount of funds from the company’s bank account. Depending on the risk profile of the company, it can be a more expensive form of financing for a business compared to other types of financing.
What these three things have in common is that they are each a type of “alternative lending.” Alternative to what? To the type of loan a company can get from a “regulated” commercial bank. This webinar explains these types of financing arrangements, what to consider before entering into them, and provides some tips on how to negotiate them.
To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/alternative-structures-po-financing-factoring-mca-2021/
Introduction to factoring, history, introduction to act, important features of the act, rights, obligation, responsibility, penality, shortcomings of the act.
Overview, Objectives and Readings Page 1 of 1OverviewT.docxgerardkortney
Overview, Objectives and Readings Page 1 of 1
Overview
This week we will further explore working capital management by focusing on various sources of short-term financing. These
sources can include trade credit, bank loans, commercial paper, the use of accounts receivable and inventory as collateral
and hedging interest rate risk.
Practice Problems: Please see the syllabus for assigned homework/practice problems.
Objectives Readings
_ _ _ __ .._
Learning objectives: Week 5 lecture materials
1. Trade credit from suppliers is normally the most Project instructions
available form of short-term financing.
2. Bank loans are usually short-term in nature and should Chapter 8
be paid off from funds from the normal operations of the
firm.
3. Commercial paper represents ashort-term, unsecured
promissory note issued by the firm.
4. By using accounts receivable and inventory as collateral
for a loan, the firm may be able to borrow larger
amounts.
5. Hedging may be used to offset the risk of interest rates
rising.
O Walsh College, Al! rights reserved
https://ool-content.walshcollege.edu/CourseFiles/FIN/FIN315/jesdale/Week05/OOR/Obj... 10/30/2017
Page 1 of 3
Financing Working Capital
Content Author: Louise August, CPA, PhD
i n the lectures on Working Capital (WC) we talked about the dollar amounts tied up in assets like Accounts Receivable (AR)
and Inventory. Because these accounts often represent substantial balances, we may need to think about how the firm can
finance its investment in WC Assets.
The first concept to consider is "Maturity Matching." That means that short-term needs should be financed with short-term
debt and vice-versa. You wouldn't finance a building with a 90-day note. So if we're thinking about how to finance the
investment in short-term assets like Receivables and Inventory short-term financing is probably the way to go.
~7~t~,tt'I~~/ ~c3~C~'tlt'1 :
Supplying the investment in WC assts with ST sources of Financing
Accounts r~e~eiva~le ~ Accruals
Inver►tory Accounts payable
5T bank loans
There are a number of sources of short-term capital available to the firm and we'll look at each of these in turn:
1. Accruals
2. Accounts Payable
3. Commercial Paper (not available to all firms, so not listed in the graphic above)
4. Short-Term Bank Loans
Accruals
This balance sheet line item usually represents unpaid wages and taxes. These
accounts represent the time periods between when a benefit is received and the
payment for it is made. An example is payroll (Accrued Wages): an employee works
today but the wages earned aren't paid until payday. Accrual accounting requires that
the firm recognize the benefit it received from the employee's efforts and the obligation it
has to pay the wages. Similarly with taxes, the firm earns a portion of its profits
throughout the year but only makes tax payments each quarter.
Not financing in the classic sense, but these accounts do represent a period of time during which payment i.
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Introduction to AI for Nonprofits with Tapp NetworkTechSoup
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A Strategic Approach: GenAI in EducationPeter Windle
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June 3, 2024 Anti-Semitism Letter Sent to MIT President Kornbluth and MIT Cor...Levi Shapiro
Letter from the Congress of the United States regarding Anti-Semitism sent June 3rd to MIT President Sally Kornbluth, MIT Corp Chair, Mark Gorenberg
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The US House of Representatives is deeply concerned by ongoing and pervasive acts of antisemitic
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2. Table of Content BBA 302 Module -V
Sources of short term finance ...........................................................................................3
1) Trade creditors.....................................................................................................................3
Advantages of Trade Credit ...........................................................................................................................4
2) Factoring..............................................................................................................................4
3) Invoice Discounting ..............................................................................................................5
4) Bank Overdraft.....................................................................................................................5
5) Counter Trade ......................................................................................................................5
Accrual.............................................................................................................................6
Working capital advances by commercial banks ...........................................................................................6
Public deposits.............................................................................................................................7
Inter-Corporate Deposit ...........................................................................................................8
Commercial Paper....................................................................................................................8
Factoring..................................................................................................................................8
Forfaiting .................................................................................................................................9
Factors influencing working capital requirement...............................................................9
1) Nature of Business ...............................................................................................................9
(2) Scale of Operations ...........................................................................................................10
(3) Business Cycle...................................................................................................................10
(4) Seasonal Factors...............................................................................................................10
(5) Production Cycle ...............................................................................................................10
(6) Credit Allowed ..................................................................................................................10
(7) Credit Availed ...................................................................................................................10
(8) Operating Efficiency ..........................................................................................................10
(9) Availability of Raw Material...............................................................................................11
(10) Growth Prospects............................................................................................................11
(11) Level of Competition .......................................................................................................11
(12) Inflation..........................................................................................................................11
3. Sources of short term finance
1) Trade creditors
This the basic source of finance and many entrepreneurs do not realize that by acquiring
items on credit they are obtaining short term finance. Credit just like any other source of
finance has interest element hidden which most are not able to recognize. The discount may
be offered to encourage early payment and the receiving company may not advantage of the
discount the cost arise. It is not a cheap source of finance. On occasions, trade credit is used
is used because the buyer is not aware of the real costs involved- if he were, he might turn to
other sources of trade finance. However, other forms of capital are not always available, and
for a company that has borrowed as much as possible trade credit may be the only choice left.
This is an important source of capital for many small companies. A company which provides
credit to another is in fact putting itself in the position of a banker whose advance takes the
form not of cash but of goods for which payment will be deferred. This use of trade credit
between companies is extremely important from both an industrial and a national point of
view.
Terms of Trade Credit
Terms of credit vary considerably from industry to industry. Theoretically, four main factors
are determined the length of credit allowed.
1. The economic nature of the product: products with a high sales turnover are sold on
short credit terms. If the seller is relying on a low profit margin and a high sales
turnover, he cannot afford to offer customers a long time to pay.
2. The financial circumstances of the seller: if the seller’s liquidity position is weak he
will find it difficult to allow very much credit and will prefer an early cash settlement.
If the credit term is used as part of sales promotion then, he may allow more credit
days and use other means for improving liquidity position.
3. The financial position of the buyer. If the buyer is in weak liquidity position he may
take long time to settle the balance. The seller may not be will to trade with such
customers, but where competition is stiff there is no choice other than accepting such
risk and improve on sales levels.
4. Cash discounts: when cash discounts are taken into account, the cost of capital can be
surprisingly high. The higher the cash discount being offered the smaller is the period
of trade discount likely to be taken.
Trade credit are also used as signaling effect on the performance of the both the buyer and the
seller. Where the days allowed to customers are increasing it may indicate that the company
is slipping in its debt collection and very soon may encounter cash flow problem More days
to the customers also increase the risk of bad debts which will reduce the profit levels of the
company. On the other hand reducing credit days to customers may result in loss of some
customers as they will always seek a supplier willing to offer more credit days.
4. For a company, as a buyer having increased credit days may indicate that the enterprise is
facing cash problems and is unable to settle their balance in good time, and this may result in
loss of business. Allowing cash discounts to pass is also a cost to the business as outlined
above. However, reducing the day’s payment to the supplier may also indicate that the
company is not trusted by its suppliers. A company with a poor track record will always face
difficulties in negotiating for more days, hence the short payment period.
Advantages of Trade Credit
1. Convenience and availability of trade credit
2. Greater flexibility as a means of financing
Who Bears the Cost of Funds for Trade Credit?
1. Suppliers -- when trade costs cannot be passed on to buyers because of price competition
and demand.
2. Buyers -- when costs can be fully passed on through higher prices to the buyer by the
seller.
3. Both -- when costs can partially be passed on to buyers by sellers.
2) Factoring
Factoring involves raising funds on the security of the company’s debts, so that cash is
received earlier than if the company waited for the debtors to pay. Most factoring companies
offer these three services:
• Sales ledger accounting, dispatching invoices and making sure bills are paid.
• Credit management, including guarantees against bad debts.
• The provision of finance, advancing clients up to 80% of the value of the debts that
they are collecting.
a) Sales ledger administration
The factoring company will take over the administration of receivable department,
maintaining the sales records, credit control and the collection of receivables. It is claimed
that the factor will be able to obtain payment from customers more quickly than if the
company was to make collection on its own. The cost of this administrative service is a fee
based on total value of debts assigned to the factor. The fee rate is based on work which is to
be done and the risk level of bad debts.
b) Credit management
For a fee the factor can provide up to 100% protection against nonpayment of approved sales.
The factoring company will always assess the credit profile of an enterprise before entering
into such an agreement. As outlined above the risk level of the company’s debts will be the
main factor in determining the fee charge.
c) Provision of finance
this is the main product which most factoring companies offer. Factor companies provide
finance which is used to boost the working capital; of the business. The factoring is not as
5. cheap as may be the bank overdrafts and because the bank borrowing is also flexible it is
imperative that the company should approach the bank first. However, factoring can be
particularly useful when a company has exhausted its overdraft and is not yet in position to
raise new equity.
3) Invoice Discounting
This is purely a financial arrangement which benefits the liquidity position of the enterprise.
Invoice discounting is the transferring of invoice to a finance house in exchange with
immediate cash. The company makes an offer to the finance house by sending it the
respective invoices and agreeing to guarantee payment of any debts that are purchased. If the
finance house accepts the offer, it makes immediate cash payment of about 75%, which
means that at a specified future date, say 90 days, the loan must be repaid. The company is
responsible for collecting the debt and for returning the amount advanced, whenever the debt
is collected.
4) Bank Overdraft
one of the most common used sources of short term of finance because of its cost and
flexibility. When borrowed funds are no longer required they can quickly and easily be paid.
It is also comparatively cheap because the risks to the lender are less than on the long-term
loans, and all the loan interests are allowable tax expenses. The bank issue overdrafts with the
right to call them in at short notice Bank advances are, in fact payable on demand. Normally
the bank assures the borrower that he can rely on the overdraft not being recalled for a certain
period of time.
The borrower is required to use the overdraft to supplement the working capital shortfall. As
the bank overdraft is payable on demand it is not wise to use the money in purchasing
noncurrent assets like machine. Financing of such assets should be made using long-term
finance such as finance lease and loans. Any plans that involve an overdraft or short term
loan should therefore refer closely to the company’s cash flow analysis so that it is quite clear
how long the funds will be needed and when they can be repaid. Another purpose for which
bank overdraft might typically be used to iron out seasonal fluctuations in trade The banks
assist in providing temporary funds to finance production on the assumption that the goods or
products will be sold in a later season. Agriculture is the obvious example of an industry
where this type of borrowing is needed.
5) Counter Trade
Counter trade is a method of financing trade, but goods rather than money are used to fund
the transaction. It is a form of barter. Goods are exchanged for the other goods. This form of
business for private enterprises is diminishing in local trading but for international trade is
still a popular way of funding the business activities.
Composition of Short-Term Financing
The best mix of short-term financing depends on:
6. 1. Cost of the financing method
2. Availability of funds
3. Timing
4. Flexibility
5. Degree to which the assets are encumbered
Accrual
Accrual (accumulation) of something is, in finance, the adding together of interest or
different investments over a period of time. It holds specific meanings in accounting, where it
can refer to accounts on a balance sheet that represent liabilities and non-cash-based assets
used in accrual-based accounting. These types of accounts include, among others, accounts
payable, accounts receivable, goodwill, deferred tax liability and future interest expense. For
example, a company delivers a product to a customer who will pay for it 30 days later in the
next fiscal year, which starts a week after the delivery. The company recognizes the proceeds
as a revenue in its current income statement still for the fiscal year of the delivery, even
though it will get paid in cash during the following accounting period. The proceeds are also
an accrued income (asset) on the balance sheet for the delivery fiscal year, but not for the
next fiscal year when cash is received. Similarly, a salesperson, who sold the product, earned
a commission at the moment of sale (or delivery). The company will recognize the
commission as an expense in its current income statement, even though the salesperson will
actually get paid at the end of the following week in the next accounting period. The
commission is also an accrued expense (liability) on the balance sheet for the delivery period,
but not for the next period the commission (cash) is paid out to the salesperson.
Working capital advances by commercial banks
Working capital advances by commercial banksrepresent the most important source for
financing current assets.
Forms of Bank Finance: Working capital advance is provided by commercial banks in three
primary ways: (1) cash credits/overdrafts, (2) purchase / discount of bills. In addition to these
direct forms, commercial banks help their customers in obtaining credit from other sources
through the letter of credit arrangement.
Cash Credits/Overdrafts: Under a cash credit or overdraft arrangement, a pre-determined
limit for borrowing is specified by the bank. The borrower can draw as often as required
provided the out standings do not exceed the cash credit/overdraft limit. The borrower also
enjoys the facility for repaying the amount, partially or fully, as and when he desires. Interest
is charged only on the running balance, not on the limit sanctioned. A minimum charge may
7. be payable irrespective of the level of borrowing for availing of this facility. This form of
advance is highly attractive from the borrower’s point of view because while the borrower
has the freedom of drawing the amount in instalments as and when required, the interest is
payable only on the amount actually outstanding.
Loans: These are advances of fixed amounts to the borrower. The borrower is charged with
interest on the entire loan amount, irrespective of how much he draws. In this respect, this
system differs markedly from the overdraft or cash credit arrangement wherein interests is
payable only on the amount actually utilized. Loans are payable either on demand or in
periodical instalments. When payable on demand, loans are supported by a demand
promissory note executed by the borrower. There is often a possibility of renewing the loan.
Purchase /Discount of bills: A bill arises out of a trade transaction. The seller of goods
draws the bill on the purchaser. The bill may be either clean or documentary (a documentary
bill is supported by a document of title to goods like a railway receipt or a bill of lading) and
may be payable on demand or after since period which does not exceed 90 days. On
acceptance of the bill by the purchaser, the seller presents it to the bank for discount/
purchase. When the bank discounts/purchases the bill, it releases the funds to the seller. The
bank presents the bill to the purchaser (acceptor of the bill) on the due date and gets its
payment.
Letter of Credit: A letter of credit is an arrangement whereby a bank helps its customer to
obtain credit from its (customer’s) suppliers. When a bank opens a letter of credit on favour
of its customer for some specific purchases, the bank undertakes the responsibility to honour
the obligation of its customer, should the customer fail to do so.
Public deposits
• The maximum maturity period for a public deposit is 3 years
• The minimum maturity period for public deposits is 6 months
• The maximum maturity period for a public deposit for Non-Banking Financial Corporation is
5 years
• The public deposits of a company cannot go past 25% of free reserves and share capitals
• The companies asking for public deposits need to publish information regarding the position
and financial performance of the firm
• The companies having public deposits need to keep aside the 10% of the deposits by 30th
April every year that will mature by 31st March next year.
• There is no involvement of restrictive agreement
• The process involved in gaining public deposit is simple and easy
• The cost incurred after tax is reasonable
• Since there is no need to pledge security for public deposits, the assets of firm that can be
mortgaged can be preserved
8. • The maturity period is short enough
• Limited fund can be obtained from the public deposits
• The interest rate is higher than the other financial investment instruments
• The fund maturity period is short
The disadvantages of public deposits from the investors' pint of view are:
• The interest that is charged on the public deposits does not enjoy tax exemption
• There is no pledging of security against public deposits
Inter-Corporate Deposit
An Inter-Corporate Deposit (ICD) is an unsecured loan extended by one corporate to another.
Existing mainly as a refuge for low rated corporates, this market allows funds surplus
corporates to lend to other corporates. Also the better-rated corporates can borrow from the
banking system and lend in this market. As the cost of funds for a corporate in much higher
than a bank, the rates in this market are higher than those in the other markets. ICDs are
unsecured, and hence the risk inherent in high. The ICD market is not well organised with
very little information available publicly about transaction details.
Commercial Paper
In the global money market, commercial paper is an unsecured promissory note with a
fixed maturity of no more than 270 days. Commercial paper is a money-
market security issued (sold) by large corporations to get money to meet short
term debt obligations (for example, payroll), and is only backed by an issuing bank or
corporation's promise to pay the face amount on the maturity date specified on the note. Since
it is not backed by collateral, only firms with excellent ratings from a recognized rating
agency will be able to sell their commercial paper at a reasonable price. Commercial paper is
usually sold at a discount from face value, and carries higher interest repayment rates
than bonds. Typically, the longer the maturity on a note, the higher the interest rate the
issuing institution must pay. Interest rates fluctuate with market conditions, but are typically
lower than banks' rates.
Factoring
Factoring is a financial transaction whereby a business sells its accounts
receivable (i.e., invoices) to a third party (called a factor) at a discount.
In "advance" factoring, the factor provides financing to the seller of the accounts in the form
of a cash "advance," often 70-85% of the purchase price of the accounts, with the balance of
9. the purchase price being paid, net of the factor's discount fee (commission) and other charges,
upon collection from the account client. In "maturity" factoring, the factor makes no advance
on the purchased accounts; rather, the purchase price is paid on or about the average maturity
date of the accounts being purchased in the batch.
Forfaiting
In trade finance, forfaiting is a financial transaction involving the purchase
of receivables from exporters by a for fainter. The for fainter takes on all the risks associated
with the receivables but earns a margin.[citation needed][1]
The for fainter may also be immunized
from certain risks if the transaction involves payment by negotiable instrument.[2]
The
forfaiting is a transaction involving the sale of one of the firm's transactions. [1]
Factoring is
also a financial transaction involving the purchase of financial assets, but Factoring involves
the sale of any portion of a firm's receivables.
The characteristics of a forfaiting transaction are:
• Credit is extended to the exporter for a period ranging between 180 days to seven years.
• Minimum bill size is normally $250,000, although $500,000 is preferred.
• The payment is normally receivable in any major convertible currency.
• A letter of credit or a guarantee is made by a bank, usually in the importer's country.
• The contract can be for either goods or services.
At its simplest, the receivables should be evidenced by a promissory note, a bill of exchange,
a deferred-payment letter of credit, or a letter of guarantee.
Factors influencing working capital requirement
1) Nature of Business
The requirement of working capital depends on the nature of business. The nature of business
is usually of two types: Manufacturing Business and Trading Business. In the case of
manufacturing business it takes a lot of time in converting raw material into finished goods.
Therefore, capital remains invested for a long time in raw material, semi-finished goods and
the stocking of the finished goods. Consequently, more working capital is required. On the
contrary, in case of trading business the goods are sold immediately after purchasing or
sometimes the sale is affected even before the purchase itself. Therefore, very little working
capital is required. Moreover, in case of service businesses, the working capital is almost nil
since there is nothing in stock.
10. (2) Scale of Operations
There is a direct link between the working capital and the scale of operations. In other words,
more working capital is required in case of big organisations while less working capital is
needed in case of small organisations.
(3) Business Cycle
The need for the working capital is affected by various stages of the business cycle. During
the boom period, the demand of a product increases and sales also increase. Therefore, more
working capital is needed. On the contrary, during the period of depression, the demand
declines and it affects both the production and sales of goods. Therefore, in such a situation
less working capital is required.
(4) Seasonal Factors
Some goods are demanded throughout the year while others have seasonal demand. Goods
which have uniform demand the whole year their production and sale are continuous.
Consequently, such enterprises need little working capital. On the other hand, some goods
have seasonal demand but the same are produced almost the whole year so that their supply is
available readily when demanded. Such enterprises have to maintain large stocks of raw
material and finished products and so they need large amount of working capital for this
purpose. Woollen mills are a good example of it.
(5) Production Cycle
Production cycle means the time involved in converting raw material into finished product.
The longer this period, the more will be the time for which the capital remains blocked in raw
material and semi-manufactured products. Thus, more working capital will be needed. On the
contrary, where period of production cycle is little, less working capital will be needed.
(6) Credit Allowed
Those enterprises which sell goods on cash payment basis need little working capital but
those who provide credit facilities to the customers need more working capital.
(7) Credit Availed
If raw material and other inputs are easily available on credit, less working capital is needed.
On the contrary, if these things are not available on credit then to make cash payment quickly
large amount of working capital will be needed.
(8) Operating Efficiency
Operating efficiency means efficiently completing the various business operations. Operating
efficiency of every organisation happens to be different.
Some such examples are: (i) converting raw material into finished goods at the earliest, (ii)
selling the finished goods quickly, and (iii) quickly getting payments from the debtors. A
11. company which has a better operating efficiency has to invest less in stock and the debtors.
Therefore, it requires less working capital, while the case is different in respect of companies
with less operating efficiency.
(9) Availability of Raw Material
Availability of raw material also influences the amount of working capital. If the enterprise
makes use of such raw material which is available easily throughout the year, then less
working capital will be required, because there will be no need to stock it in large quantity.
On the contrary, if the enterprise makes use of such raw material which is available only in
some particular months of the year whereas for continuous production it is needed all the year
round, then large quantity of it will be stocked. Under the circumstances, more working
capital will be required.
(10) Growth Prospects
Growth means the development of the scale of business operations (production, sales, etc.).
The organisations which have sufficient possibilities of growth require more working capital,
while the case is different in respect of companies with less growth prospects.
(11) Level of Competition
High level of competition increases the need for more working capital. In order to face
competition, more stock is required for quick delivery and credit facility for a long period has
to be made available.
(12) Inflation
Inflation means rise in prices. In such a situation more capital is required than before in order
to maintain the previous scale of production and sales. Therefore, with the increasing rate of
inflation, there is a corresponding increase in the working capital.