SOLICITOR IN PRESTON

Working Capital

What is Working Capital?

Working capital management is crucial for all stakeholders in businesses of all shapes and sizes. Finance is available to ensure liquidity to meet short-term obligations and support day-to-day operations.

Management teams plus outside investors and creditors use working capital to assess a company's financial health and risk level, with positive working capital leading to a multitude of benefits - for example, suppliers evaluate a company's working capital to gauge its reliability in paying invoices on time, or large companies with tender processes will assess a supplier’s ability to deliver the project whilst they maintain lengthy payment terms. Effective working capital management is essential for strategic planning, cash flow forecasting, and operational efficiency.

Working Capital Strategies

Working capital finance is versatile, suitable for various businesses needing to manage cash flow gaps or support growth, including:

  • Retail Businesses: To cover inventory costs before sales revenue comes in.
  • Manufacturing Companies: For upfront investments in materials and labor before selling products.
  • Service Providers: To pay operational costs during delays between service delivery and payment receipt.
  • Seasonal Businesses: To manage expenses during off-peak periods with lower revenue.
  • B2B Companies: For bridging longer payment cycles common in business-to-business transactions.
  • Rapidly Growing Companies: To support expansion phases when existing cash flow isn't enough.

Working capital finance is essential for businesses facing operational expense challenges, waiting on payments, or seizing expansion opportunities, making it a critical tool for maintaining liquidity and fostering growth.

The Deal Process

Understand working capital cycles

What is coming in and what is going out?

The right type of facility

The nuance of any working capital gap and the business type (sector etc) will define the right type of working capital support required.

Options

From Merchant Cash Advances for retailers, to Revolving Credit Facilities, to Confidential Invoice Discounting, there are a multitude of different options, so assess the options available and and marry them to the business need.

Offers

Lenders will quickly give indicative terms, which can be compared lender to lender.

DD & legals

The due diligence process will involve financial stress-testing, lots of questions and assessments of facets of the business, potentially an on-site survey, meetings with management and then finally legals.

Funding

Receive the money and have working capital freedom.

Items to Consider & FAQs

Items to consider:
There are a multitude of different types of working capital facility, so as advisors, we would absolutely advocate for understanding the options thoroughly before entering into a facility. Often just a tweak of structure will materially affect price and ‘ease’ of any facility.

Why do you REALLY need a working capital facility?

The 3 most common reasons companies need a working capital facility are because a) they pay their suppliers before they get paid by their customers; b) they are going through growth phase and c) they are a seasonal business. In all of these instances, you need to drill into the real problem - growth is not a problem if it pays for itself!

Apart from raising funds, what can I do?

Negotiate hard. Can you pay suppliers on longer terms? Can your customers pay sooner or upfront? Can you change the repayment structure on a financing agreement? Can you move staff bonuses to a part of the year where you are cash rich? What can you do to expedite cash in and slow cash out?

What types of facilities are out there?

There are all manner of working capital solutions for growing businesses; revolving credit facilities, invoice discounting (in 3 or 4 guises - confidential invoice discounting, factoring, selective invoice finance, debtor funding etc), Full Asset based lending facilities, a standard term loan - the list goes on and within each and with each lender that offers, there are nuances. It can be a real minefield to find what suits your business.

How long does it take to setup a working capital facility?

Realistically, if you can provide all the information timeously to lenders it should be within 4-8 weeks of placing an application. 

What matters most to lenders during the application process?

Cashflow & security - can their facility provide you with the cashflow to maintain the business plan and can they be sure in the veracity of the security against which they provide that cashflow.

Are there costs involved with setting up a facility?

As with anything, yes, although working capital facilities will tend to have lower due diligence and legal costs than other facilities; the legal and due diligence process is often done in house at the lender. You may need to budget for between 1 & 5% of the facility size in fees and ancillary costs.

Can you give one piece of free advice?

Yes - if it is us or anyone else, use an advisor with sector experience.

Here to help - Get in touch with our team

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