How to Increase Your Working Capital Financing?

As a business owner, whether leading an SME, a dynamic startup, or rocking the freelance game, the need for working capital keeps you on your toes every single day. How do you keep the wheels turning when your cash reserves run low? How can you stay ahead of the game while balancing the act of paying suppliers with clients' delayed payments?

Fear not, because financing your working capital is here to save the day, injecting a much-needed dose of cash. Get ready to take action with these concrete steps to supercharge your working capital financing!

1 – How to Increase Your Company’s Working Capital (WC)

In the world of finance, certain principles stand strong regardless of business size or industry. A key concept lies in understanding the significance of working capital (WC) and its impact on operational success. Let's dive into these fundamental finance insights you can't afford to overlook.

1.1 – Mastering the Art of Working Capital: Definition and Calculation

Working capital is the lifeblood of your company's operational cycle. Before reaping the rewards of sales revenue, you must navigate the intricate web of purchasing goods and services from suppliers. The working capital requirement (WCR) represents the difference between current assets (inventory and accounts receivable) and current liabilities (suppliers, social security contributions and tax obligations).

1.2 – Decoding Financial Structure: The Power of the Balance Sheet

As you delve into the financial landscape, the balance sheet becomes your compass. Within its depths, you'll uncover valuable financial ratios:

• Working capital (WC) = Permanent capital (equity + long-term debts) – net fixed assets.
• Working capital requirement (WCR) = Current assets – current liabilities.
• Net cash position (NCP) = Active cash – passive cash.
• Ultimately, NCP = WC – WCR.

1.3 – Cash flow constraints: Consequences of neglecting working capital

When the scale tips, and working capital exceeds net working capital, the urgency for short-term financing becomes paramount. Failure to address this critical need puts your supplier payment deadlines at risk. A domino effect unfolds, impacting not only your cash flow but also jeopardising essential relationships with service providers. Procurement challenges and disrupted operations hinder your business' growth. Remember, neglecting suppliers is a sure path to self-destruction.

2 – Unleashing the Power Within: Financing Your Company’s WCR Internally

When it comes to optimising your working capital financing, the secret lies in taking action within your company. Take charge and explore two options. Keep in mind the financial equation: (WC – WCR = NCP).

2.1 – Boost Your Working Capital for WCR Financing

This solution is the epitome of sustainable success. Revitalise your balance sheet structure by trimming fixed assets, boosting long-term resources, or both. When your permanent capital outweighs your net investments, you gain a powerful financial safety net to fuel your operational cash needs. Tap into this working capital goldmine to finance your BFR, whether partially or in full.

2.2 – Concrete Actions to Reduce Structural WCR

Ready to conquer your working capital challenges without external financial assistance? It's time to embark on an internal journey and trim down working capital. This action can inject cash into your business. But remember, there may be limitations to reducing working capital requirements.

2.2.1 – Inventory Mastery: Avoid Shortages, Maximise Efficiency

For businesses of all stripes, excessive inventory shackles cash flow. Break free by optimising inventory management based on orders, production needs, turnover rates and more. Slash excess stock to the essentials, but tread carefully—ensure you maintain the necessary materials and goods to keep your operations running smoothly.

2.2.2 – Empower Your Cash Flow: Minimise Outstanding Customer Balances

You need financing for accounts receivables, whether you are in commerce, manufacturing, or providing services. When it comes to minimising outstanding customer balances, ditch unfavourable practices like delaying supplier payments and embrace proactive strategies instead. Bill promptly and in real-time. Set reasonable and competitive payment terms. Strengthen customer follow-up processes. Resolve disputes swiftly. Encourage early payments with enticing discounts. And when all else fails, request upfront deposits.

2.2.3 – Extend Supplier Payment Terms Knowing the Consequences

Enter the realm of supplier relationships: the only operational debts where you hold the power to enhance your financing. Seek opportunities to negotiate extended payment deadlines with your suppliers, but beware of the pitfalls. Shun the temptation to postpone invoice payments beyond the due date, for the law demands specific terms on each invoice, and penalties await non-compliance.

And remember, when stretching payment terms, be mindful of your suppliers' financial well-being. This is especially true for intermediary platforms (B2B marketplaces, IT service providers, etc.), where it is crucial to nurture strong partnerships with freelancers and SMEs. Avoid excessive demands that could damage these vital alliances. Losing them altogether would be a price too high to pay.

3 – Unlocking External Financing to Supercharge Your WCR

You've done all you can to optimise your working capital, but the (WC – WCR) equation still plays hard to get. Fear not, the time has come to explore external solutions.

3.1 – Bank Financing to Conquer Your WCR

Banks continue to be a traditional means of financing your WCR. When applying for a loan, even for short-term credit, it's essential to bolster your case. Arm yourself with a comprehensive financing plan, a cash flow budget and impeccable annual accounts. Financial institutions often require collateral. Be prepared for a potentially lengthy review process.

The solutions at your disposal vary based on your business activities, growth trajectory, and seasonal patterns. Authorised overdrafts, short-term credits, seasonal financing or invoice discounting are among the arsenal of financial resources sought from traditional banks.

3.2 – Factoring: Streamline Cash Flow With Customer Receivables

By assigning your customer receivables to a factor, you unlock working capital financing while maintaining control of your cash flow. With each assignment, you receive upfront cash advances that bolster your financial flexibility. The factoring company charges a retention fee as a guarantee against the assigned balance.

But heed the caveat, for this method of working capital financing lacks flexibility. Selective assignment or cherry-picking specific invoices becomes a distant dream. And let us not forget the cost, for it is calculated based on total sales volume, impacting your overall business expenses.

3.3 – The Digital Revolution: Enter the Era of Embedded Invoice Financing

Digital companies, rejoice! A new era of working capital financing dawns upon you. Aria, the leading specialist in B2B BNPL (Buy Now Pay Later), offers a groundbreaking solution that empowers your business with cash advances for instant supplier payments.

Our cutting-edge technology seamlessly integrates an invoice financing solution directly into your platform through API wizardry. Whether you operate a marketplace or a specialised SaaS platform, or even if you're a freelance service provider for tech companies, the power of near-instant settlement awaits with a single click, right within your platform. Embrace the future, for it is now within your grasp.

Supercharge and streamline your working capital financing with an embedded invoice financing solution. Seamlessly integrate finance right into your company's application, delivering unparalleled convenience to users. Boost their cash flow without risking yours. Connect with one of our experts today and unlock a world of possibilities with Aria.