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5 Ways Working Capital Financing Could Be the Key to SME Success

By B Cressy

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August 14, 2023

South African SMEs are a lot like houseplants. For both entities, the only consistent sign of success is growth. But unlike your neglected pothos (seriously, when was the last time you watered that thing?), a business needs a lot more than regular hydration and sunlight to thrive. That doesn’t mean that the solution to stimulating growth isn’t simple, though. Working capital financing could be exactly what you need to support the exponential growth of the business. 

That’s because, when it’s used correctly, short-term financing can be conducive to long-term success. Furthermore, when working capital financing is secured through a trusted financing partner, it can prove to be a fast and flexible way to fund your business’s expansion without cutting into your operational costs. By the end of this article, you’ll know exactly how to apply for and receive working capital financing online and without collateral in approximately 24 hours.

What is working capital financing? 

Let’s start with the basics – what do we mean when we talk about working capital finance? Well, it’s in the name: working capital financing describes short-term funding strategies which are typically used to cover the operational costs of the business instead of purchasing long-term assets like equipment or to make investments. 

Why would a business take on this kind of financing? Well, by funding the company’s everyday operational costs and short-term needs, you’re in a better position to redirect income into growth opportunities without compromising the business’s ability to self-sustain its operations or dip into its savings. A working capital loan can finance things like payroll, rent, and inventory, thereby freeing up funds that can be recouped relatively quickly on a once-off or revolving basis. 

For example, a growing enterprise may apply for working capital financing to fund its expansion into a new region. The loan will act as a buffer until the new branch finds its feet and becomes self-supporting. Working capital financing measures are not just for businesses with cash flow challenges; alternative funding solutions empower growing businesses to capitalise on expansion opportunities. Having extra cash in the reserves helps build a solid sense of security when circumstances are uncertain – which they are in times of growth!

Taking out a working capital loan is also suitable for businesses with high seasonability or cyclical sales. During fallow periods, when business activity is reduced, working capital loans can be used to cover operational costs while the company prepares for the busy season. Used this way, working capital financing can be used to lessen the strain on businesses during quiet seasons. 

What are the types of working capital financing? 

There are a few different types of working capital financing. The ones we’re going to focus on in this article are term loans, a business line of credit, and invoice financing. The type of financing that your company is best suited to depends on the circumstances of the business, cash flow patterns, and how quickly and flexibly you need to access business financing. 

Term loan 

One of the simplest ways to access working capital finance is by applying for a term loan. This entails applying for a lump sum of money, much like with traditional business funding. However, with the right financing partner, this kind of financing can be accessed with much more speed and flexibility than is typically possible with traditional funding institutions. 

If you are going to apply for a term loan from an alternative funder, there are a few green flags to look out for. We wrote this guide on how to keep yourself safe from scams. Topline summary? Look out for a SASFA affiliation and a free loan calculator. Simplicity and transparency are positive qualities to screen for. 

Business line of credit 

A business line of credit is a type of revolving credit that allows businesses to borrow and repay as often as needed within a predetermined limit. Of all the kinds of working capital financing, this is perhaps the best-suited to long-term business operational costs because it can be utilised on an as-needed basis. 

So, for instance, if your business is granted a line of credit for a year, you could conceivably borrow and repay 65% of the allotted amount every month – much like you would use a regular credit card as an individual. The benefit of a line of credit is that it only accrues interest when debt is taken out of it. Put simply, if you don’t use it, you don’t pay for it. This type of working capital finance grants a lot more flexibility typically found in other types of business funding, especially from traditional institutional sources. 

Invoice financing 

Invoice financing is a working capital solution that is easier for most growing businesses to qualify for because it is secured by an asset – the invoice itself. Here’s a super succinct summary of how it works: 

  1. The business uses its unpaid invoices as security to borrow from a lender. 
  2. The business can use the funds from the sale for a number of reasons, including simply to fund an immediate project, improve cash flow, pay employees and suppliers, or reinvest in growth opportunities. 
  3. The business collects payment from the customers on its outstanding invoices and repays the lender. This can be done discreetly without the customers ever knowing. 

Many SMEs struggle to access traditional business funding because they lack any assets to pledge as collateral. The right alternative lender knows that growing businesses do have assets to offer, they just don’t resemble those which are typically categorised as such.

The 5 benefits of working capital financing 

Trying to suss out the benefits of working capital financing for your business? Here are some of the pros of applying for this kind of business funding. 

  1. Eliminate collateral and retain control of the business 

Working capital loans are typically unsecured, which means that you don’t have to pledge collateral to secure the loan. This is best suited to growing businesses who do not have any assets to offer as collateral, or else don’t want to put assets (either private or belonging to the business) on the line. 

Working capital loans are also a kind of debt financing, which means that business owners do not have to exchange any equity in the business in exchange for funding. 

  1. Improve cash flow 

Every business that ever existed has run into cash flow interruptions; it is one of the biggest threats to SME growth in the country. Don’t let pauses in cash flow halt your business’s growth. Improve cash flow by leveraging working capital financing to run operations with consistency, even during periods of reduced demand. 

  1. Handle unforeseen expenses with ease 

Having extra cash reserves is the best way to prepare for the unexpected. But it takes a really long time to save enough cash to keep the business afloat if and when unforeseen expenses come up. And what if they come up before your savings are sufficiently padded to ensure a soft landing? 

That’s where the flexibility of working capital financing comes in handy. Simply having the facility on hand is enough to provide a reassuring sense of stability and a surefire way to handle unpredictable expenses without sacrificing the business’s future financial stability. 

  1. Strengthen supplier relationships 

Working capital financing can have a positive impact on the business’s turnover ratio, which in turn can strengthen supplier relationships. Because working capital loans can establish consistent cash flow patterns, smaller businesses can settle their accounts with suppliers on time every time. 

Building a reputation for settling accounts timeously is essential for establishing healthy business relationships from the get-go but, as a smaller business, this is not always possible. Working capital financing helps bridge the gaps between where you are and where you want to be with ease and flexibility. It’s like adding a drop of rocket fuel to the steam of your own accounts receivable. Who wouldn’t benefit from a boost? 

  1. Seize growth opportunities with both hands

It’s one of the many Catch-22 situations associated with running a business: you need money to make money. It doesn’t matter how many lucrative growth opportunities come knocking at your door if you don’t have the capacity (read: staff, equipment, premises, marketing) to take them on. 

Relying solely on your accounts payable to fuel growth opportunities is like operating with one hand tied behind your back – entirely possible but very, very difficult. Working capital financing frees you up to take hold of growth opportunities with both hands. By applying for a working capital loan facility, you’re preparing your business to capitalise on the once-in-a-lifetime opportunity – whenever it might come up.   

Apply for fast, flexible financing from Bridgement 

So, to recap: working capital financing may be better suited to growing businesses because: 

  • It facilitates access to funding with much more speed and flexibility than conventional business funding types 
  • The right alternative funder will assess your growing business’s assets with a different perspective, granting access to funding that many traditional funders are not able to make available  

Your business doesn’t need business funding from a loan facilitator. It needs a funding partner who knows where and how to look at an SME’s assets to accurately assess what kind of funding they qualify for. Why twist yourself into a pretzel trying to fit funding standards that are not designed for growing businesses? 

Bridgement is the funding partner that facilitates access to up to R5 million in business funding in 24 hours or less. It only takes two minutes to apply to one of our working capital financing solutions online. Simple as that. 

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