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Working Capital Financing vs Traditional Business Financing
Business financing is the process of provision of funds to a business entity to facilitate its financial, or operational activities. Financing may be required to start, run, or expand a business.
There are various types of financing that a business may avail. In the lines to follow, we will discuss working capital financing vs. traditional business financing.
Businesses may not need financing to expand their business operations or start new ventures only but they may also need it to run their existing business operations smoothly. Credit is an important aspect of business regardless of its nature and size. The majority of the business transactions are based on deferred payments and not instant cash. This way most of the businesses are always in need of financing. This can be different according to the nature of the business requirement.
Working Capital Financing vs Traditional Business Financing
Traditionally businesses need financing on a long-term basis to expand their productivity, start new activities, make profitable investments, and so on. For this purpose, they need long-term business financing options. But at the same time, they may need financing to run their day-to-day business activities and operations, for this, they need short-term working capital financing.
Working capital financing is different from ordinary business financing in many ways. Let’s take a look at both.
Purpose of Financing:
Working Capital Financing:
This type of financing is primarily focused on meeting a company’s short-term operational needs. It provides funds to cover day-to-day expenses, such as inventory purchases, payroll, rent, utilities, and other routine operational costs.
Business Financing:
Business financing encompasses a broader range of funding options that can be used for various purposes such as expansion, purchasing equipment, real estate, or other long-term investments that are critical for the growth and sustainability of the business.
Nature of Financing:
Working Capital Financing:
It is typically short-term in nature, meant to bridge gaps in a company’s cash flow over the short term, often within a year or less but is usually referred to as a quarter of a year.
Business Financing:
Business financing can be both short-term and long-term, depending on the specific needs of the business. It can span several years or even decades for long-term investments like buying real estate or acquiring another company.
Usage of Funds:
Working Capital Financing:
Funds obtained through working capital financing are typically used to cover current liabilities and ensure the smooth day-to-day operations of the business.
Business Financing:
Funds from business financing can be used for a wide range of purposes, including capital expenditures, business expansion, product development, marketing initiatives, and strategic investments.
Collateral for Financing
Working Capital Financing
Working capital financing is usually collateral-less or may involve a soft collateral. Usually, the invoices may act as collateral for working capital financing.
Business Financing
As the magnitude and repayment span of business financing is far greater than that of working capital financing, it usually requires tangible collateral like building, plant and machinery, inventory, or stocks.
Risk of Financing:
Working Capital Financing:
Since it deals with short-term needs and comparatively smaller amounts, working capital financing options often have a lower risk profile.
Business Financing:
Long-term business financing options may involve higher risk and potentially higher costs, especially if they require giving up equity or collateral.
Cost of Financing:
Working Capital Financing:
Working capital financing is usually obtained without involving tangible assets and is processed instantly so it may have a higher percentage of markup/fee. Considering the amount of financing, nature of the requirement, and payback period it can be viable.
Business Financing:
As business financing is obtained against solid collateral and repayment spreads over a long period, the cost of acquiring financing may be lower and more viable.
Repayment Terms:
Working Capital Financing:
Repayment terms for working capital financing are usually shorter, with periodic payments over a few months to a year.
Business Financing:
Repayment terms for business financing can vary widely, ranging from a few years to several decades, depending on the type of financing and the purpose of the funds.
Examples:
Working Capital Financing:
Examples of working capital financing include short-term loans, lines of credit, trade credit (supplier credit), and invoice financing (invoice factoring and invoice discounting).
Business Financing:
Examples of business financing include term loans, equity investments, venture capital, angel investments, corporate bonds, and mezzanine financing.
In a nutshell, working capital financing is designed to address short-term operational needs and cash flow issues, while business financing encompasses a broader set of funding options that can support various aspects of a business’s growth and development, including both short-term and long-term objectives. The choice between the two depends on a company’s specific financial needs and goals.
InvoiceMate as Working Capital Financing Enabler
InvoiceMate is the world’s first blockchain-based invoice management system that enables invoice financing. InvoiceMate acts as a bridge between the SMEs seeking working capital financing and the financing institutions. With its trust, transparency, and immutability features, it provides quicker, more secure, and cost-effective due diligence (KYI: Know Your Invoice) of invoices to financing institutions. It enables risk profiling and credit scoring for a business, making it eligible for working capital financing (Conditions may apply).
InvoiceMate is working for the financial inclusion of SMEs in Pakistan and the UAE by enabling working capital financing services.
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