Learn something new every day
More Info... by email
Short-term working capital refers to funds needed by a business to handle the standard and usual expenses associated with the operation of the company. Working capital of this type makes it possible for the business to meet its obligations to vendors and suppliers in a timely manner, which in turn helps to protect the credit rating and reputation of the business. While many businesses are able to generate short-term working capital through receipt of customer payments, there are situations in which businesses will utilize some other strategy to obtain the capital needed to manage currently pending debt obligations.
There are many different approaches to obtaining short-term working capital when receipts from outstanding receivables are not sufficient to meet immediate needs. One strategy is to obtain a working capital loan that is structured for repayment in less than one calendar year. This approach is often helpful for businesses who experience consistent seasonal shifts in business volume, since the proceeds from the loan can be placed in an interest-bearing account and used as needed to meet payroll or purchase raw materials for use in production. Once the business enters a season where the flow of income is greater, the loan can often be retired early, helping to offset any interest that the lender applied to the loan.
In situations where the need for working capital may be ongoing, a process known as factoring is often effective for generating short-term working capital. Essentially, working capital factoring involves working with a lender who is willing to purchase the invoices generated in the current billing period. The lender then issues the business a large percentage of the total face value of those invoices, with 80% being the standard used by many factoring services. Customers remit payments to a billing address supplied by the lender. Once the payments are received and the amount of the cash advance is paid in full, the factoring service sends a second payment that represents the remaining balance due to the business less a small percentage as the fee for providing the financing.
A third means of creating a source of short-term working capital is to establish a line of credit with a bank or other lender. This allows the company to draw on that credit line when and as needed. One of the benefits of a working capital line of credit is that the business can obtain funds needed to meet expenses due at the first of the month, then repay that amount before the closing date, returning the outstanding balance on the credit line to zero. This means that the business pays little or no interest, since any interest assessed would be based on the actual amount withdrawn and not the entire credit limit.
One of our editors will review your suggestion and make changes if warranted. Note that depending on the number of suggestions we receive, this can take anywhere from a few hours to a few days. Thank you for helping to improve wiseGEEK!