Do you own a business and want short-term working capital, but don’t know where or how to get it? Business is full of uncertainties. Risks can occur in your business at any time requiring finance.
Four sources of short-term working capital
1.) Your own savings
You can get short-term working capital from your own savings without having to worry about paying any interest. But this amount may not be substantial enough to meet all the short-term requirements of your business, as it is usually small.
2.) Apart from the long-term loan
The long-term loan you had borrowed can be used in part to finance short-term needs. Sometimes this amount may not be available because it has already been fully used.
3.) Bank loans
Banks are the main short-term money lenders. They lend loans for six months. This means that you have to pay them all of their money plus a certain percentage of interest within six months. You can get secured or unsecured loans from them depending on the relationship you have with your bank. You can also take an overdraft or cash credit from your bank.
4.) Accounts receivable
It’s the smartest way to get short-term working capital, especially if your business always sells products on credit. Here, goodwill plays a great role in streamlining your business transactions. You sell the goods on credit and your customers’ accounts are debited with the same amounts.
Based on your customer’s accounts receivable, you can obtain loans or factor advances. When money is received from the factors against these accounts, it is called accounts receivable financing.
Two Types of Accounts Receivable Financing
A.) Financing of Ordinary Accounts Receivable or Non-Notification
It is a short-term financing system. You enter into an agreement with the financial institution that agrees to purchase the non-notice or advance you a certain amount of money against the non-notice. Your clients are not intimate with this arrangement.
B.) Factoring
This is the arrangement by which the factor buys the accounts receivable (sundry debtors) of your business and assumes all the risk of non-payment. There is an agreement between you and the factor. The factor pays you money against your client’s debts.
Five differences between non-notification and factoring
1.) Factoring takes responsibility for bad debts, while in non-notification, the seller is responsible for bad debts.
2.) Factoring is responsible for the collection of bad debts while in non-notification the seller is responsible for collecting them.
3.) Factoring forwards the invoices to their clients, while in non-notification, the seller is the one who sends the invoices to the clients.
4.) In factoring the client is informed while in non-notification the client is not insinuated.
5.) Factoring is the reporting of receivables financing, while ordinary receivables is the non-reporting of receivables financing.
