Working capital finance is a crucial business finance solution that helps organisations maintain adequate cash flow to effectively manage operational costs, invest in new distribution streams and expand into new products or markets without accessing their cash reserves. This type of financing addresses short- to medium-term needs, enabling businesses to cover essential expenses like stock, payroll, equipment and accounts payable. It can also assist businesses with accelerating the cash flow around their outstanding commercial invoices.
Commercial finance brokers play a vital role in helping businesses access working capital finance. These brokers facilitate various financing options to bridge gaps between cash inflows and outflows, especially during slow receivable periods or seasonal fluctuations. For commercial finance brokers, understanding the intricacies of working capital finance is crucial to advising business owners and financial decision-makers effectively.
When and how to access working capital finance
Working capital finance is primarily used by small-to-medium sized businesses across a wide range of industries, including retail, manufacturing, labour hire and healthcare services. These businesses often face cash flow challenges due to slow receivables, seasonal fluctuations, or the need to invest in greater inventory levels and more advanced equipment. Commercial finance brokers can identify and recommend the most suitable working capital finance solutions to meet their business client’s unique needs.
Dan Verdon, Octet’s NSW Director Working Capital Solutions, says that applying for working capital finance typically involves assessing the business’s cash flow needs and selecting the appropriate financing option. According to Dan, brokers support businesses in this process by evaluating their financial health, understanding the cash flow cycle, and recommending tailored funding solutions.
“For instance, a manufacturing company with a substantial accounts receivable might benefit from debtor finance, while a healthcare business importing medical consumables needing to pay overseas suppliers promptly will likely find trade finance more advantageous,” explains Dan.
Common types of working capital finance
Dan says it is important to understand the different types of working capital finance, how they work, and what’s best for the business’ situation.
“Navigating the various types of working capital is essential for optimising cash flow and ensuring supply chain management efficiency,” says Dan. “Understanding the best options for the business’ needs can enhance financial stability and provide a competitive edge.”
The various types of working capital finance include:
- Debtor (Invoice) Finance: Access funds tied up in outstanding business invoices, providing immediate, personal security-free cash flow based on the accounts receivable.
- Trade Finance: A revolving line of credit allowing businesses to pay their local and global suppliers quickly, improving cash flow and speed to market.
- Term Loans & Asset Finance: Quick funding with fixed repayment schedules, ideal for immediate cash flow needs.
- Trade Credit: Suppliers extend payment terms, allowing businesses to defer payments for goods and services, thereby managing cash flow more effectively.
- Lines of Credit: Flexible access to funds up to a predetermined limit, allowing businesses to withdraw as needed.
- Bank Overdraft: A short-term financing option that allows businesses to withdraw more money than is available in their account, up to an agreed limit.
The benefits of working capital finance
The benefits of working capital finance can be substantial. It improves cash flow, supports efficient operations, and enhances the business’s ability to seize growth opportunities. “By leveraging these financing options, businesses can maintain short-term stability and focus on long-term success, ensuring resilience and adaptability in a competitive market,” states Dan.
However, it is important to align the strategic implementation of supply chain financing with the requirements of the business. Some aspects to consider are:
- Align financing with cash flow cycles: Ensure that the chosen finance solution matches the business’s cash flow patterns to avoid repayment stress.
- Diversify financing sources: Utilise a combination of finance options to spread risk and maintain flexibility.
- Monitor financial health: Regularly review the business’s financial performance and the total cost of any external finance facility to adjust strategies as needed.
- Leverage relationships: Develop strong relationships with suppliers and financiers to negotiate better terms and rates
For commercial finance brokers, understanding and effectively communicating these aspects of working capital finance can have a significant, positive impact on the financial health and growth of their clients.
How to Calculate Working Capital
Understanding how to calculate working capital is fundamental for effective financial management. Working capital is the difference between a company’s current assets and current liabilities. The basic formula for calculating working capital is:
Working Capital = Current Assets – Current Liabilities
| Current Assets |
Cash and anything that can be converted into cash within a year, eg raw materials, accounts receivable, inventory, stocks, and bonds. |
| Current liabilities |
Bills which are due to be paid within a year, eg accounts payable, payroll, tax, and overheads. |
This formula provides a snapshot of a company’s short-term financial health and operational efficiency. Positive working capital indicates that a company can cover its short-term liabilities with its short-term assets, which is crucial for maintaining smooth operations and supporting business growth.
Octet Working capital solutions – powering business growth
Octet’s tailored working capital financing and payment facilities help businesses effectively manage their cash flow and facilitate sustainable growth. With Octet, businesses can:
- access a flexible line of credit to power business trade
- leverage unpaid invoices to access fast working capital
- expand business operations with a flexible, tailored loan
- use existing credit or debit cards to pay suppliers
- streamline payments and take control of the supply chain.
We offer a comprehensive suite of financial solutions to empower businesses with the capital they need to thrive.
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Debtor Finance
This solution helps manage cash flow by providing immediate access to up to 85% of unpaid business invoices, without the need for personal asset security. |
Trade Finance
Set flexible supplier payment terms with up to 60 days interest-free and 120 days repayment, whilst enjoying bank-beating FX rates. |
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Term Loan
Flexible finance for a range of business needs including investment in new assets, consolidation of loans or equipment purchase. |
Octet Pay
Use business credit cards or other payment sources to pay any invoice. Benefit from market-leading FX rates when paying international suppliers. |
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Supply Chain Accelerate
A fast and flexible solution that pays 100% of supplier invoices with up to 90 days to repay. |
Supply Chain Management Platform
Our innovative digital platform makes it easy to track, validate and authorise across each stage of a transaction. |
Discover how to partner with Octet today
Octet is committed to supporting businesses through tailored financial solutions, helping them understand their cash flow and funding options and ensuring they are well-positioned to seize growth opportunities. If you’re a business decision-maker and want to know more, get in touch with the team today.
Or if you are a commercial finance broker with clients who could benefit from smarter working capital solutions, our Referral Partner Program empowers businesses across a range of industries with innovative working capital solutions.
Speak to our team of working capital specialists today to discover how we can power business growth.
Disclaimer: These comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.
