Working capital financing is used to fund your company’s investment in short-term assets such as accounts receivable and inventory, and to provide liquidity so that your company can fund its day-to-day operations including payroll, overhead and other expenses. There are many types of working capital financing. The best fit for your company will depend on its industry, business model, stage of development, and the current assets on its balance sheet.
If your company needs short-term financing, reach out to the Find Venture Debt team. We can help you determine the right solution and connect with the right lenders and finance companies. Contact us to get started.
Working capital financing includes loans, sales, assignments, guarantees, and favorable terms from customers and vendors. We have organized the types of working capital financing into categories as shown below.
A working capital revolver is a line of credit in which the maximum amount available for borrowing is tied to the amount of accounts receivable and inventory on the company's balance sheet. This secured credit line is described as a revolver since funds can be borrowed, repaid, and then reborrowed over and over again. Working capital loans secured by accounts receivable and/or inventory are a form of asset-based lending (ABL).
A working capital revolver is also known as a: (i) working capital line of credit, (ii) working capital credit facility, (iii) working capital facility, (iv) revolving credit facility, or (v) revolving loan facility.
Some lenders offer unsecured lines of credit, often referred to as a business line of credit. These unsecured lines are usually targeted toward small businesses (with the owner providing a personal guarantee) or very large businesses (with strong credit histories).
Accounts receivable factoring is the sale of accounts receivable to a third-party at a discount to accelerate the receipt of cash. The discount is the fee charged by the third-party buyer (or factor) for its service. The factor primarily relies on the creditworthiness of the company’s customers in determining the amount of the discount. The customer is usually notified about the sale and the factor is responsible for collection. Receivables may be sold on a recourse or non-recourse basis. Spot factoring is the sale of a single invoice rather than all of a company’s receivables. Accounts receivable factoring is also referred to as invoice factoring.
Invoice discounting is the assignment of accounts receivable to a third-party as collateral for a loan. The customer is not usually notified about the assignment and the company remains responsible for collection. The company receives a loan similar to the way it would with a revolving line of credit.
Purchase order financing, or PO financing, is an advance given to your supplier by a lender for goods your company needs to fulfill a customer order. The customer then makes its payment directly to the lender. After deducting the amount of its loan and fees, the lender sends the remainder to your company. PO financing provides capital to fulfill large orders that you might not be able to finance otherwise.
Trade finance facilitates international trade by transferring to a third-party the risk that an exporter will not receive payment, or an importer will not receive its goods. There are many forms of trade finance including letters of credit, bank guarantees, asset-based loans, accounts receivable factoring, and purchase order financing.
Customer advances are cash payments received before a company provide goods or services to its customer. These advances provide an important source of “no-cost” working capital financing. Of course, the company incurs an obligation to provide the goods or services to the customer in the future, which is usually recognized as a deferred revenue liability on its balance sheet.
Vendor credit enables you to wait a specified period of time before paying for goods or services provided by a supplier or vendor. Payment terms may offer a discount for paying early or a penalty for paying late. Some vendors offer extended terms to select customers, which provide a longer than normal period before payment is due.
An MRR line of credit is a loan facility in which the amount available for borrowing is tied directly to the borrower’s monthly recurring revenue. Software-as-a-service (SaaS) companies have minimal accounts receivable because customers pay up front, and no inventory because they sell a service rather than the product. However, SaaS companies have recurring revenue that lenders view as an asset that, in effect, can provide a collateral base for a loan.
Merchant cash advances (MCA) are upfront payments that you receive in exchange for a percentage of your future daily credit/debit card receipts. An MCA is not a loan but a sale of future revenue. This is expensive financing but might be the best bet for a business with limited or poor credit history that also processes a lot of credit card transactions.
● Can be relatively low cost financing, especially if secured, short-term debt.
● Non-dilutive or minimally-dilutive to equity holders.
● Amount available to borrowing grows as the business grows.
● Smooths out fluctuations in cash flow due to seasonality or a large, slow-pay customer.
● Can be expensive, especially accounts receivable factoring and merchant cash advances.
● Not for pre-revenue companies. Funding is usually based on accounts receivable, inventory, or reliable future revenue.
● Lender or finance company requirements. Borrower may need to modify its credit, billing and collection practices to conform.
● Restrictive covenants. Working capital loans require various financial and operational covenants by the borrower.
Each lender will have their own requirements that they look for, and it varies based on the type of working capital loan you’re looking to qualify for.
Your term sheet will vary based on what type of financing you’re getting. The most important provisions that are important to all borrowers include structure, term, rates & fees, collateral requirements, and restrictive covenants.
Working capital financing is offered by a variety of banks, non-bank lenders, and finance companies. When you contact us at Find Venture Debt, we help you determine the right solution and match you with the right lender or finance company for your needs.
