Financing for businesses comes in many different forms. And crucially, it can come at many different times in a company’s growth and lifecycle. It is easy to get so fixated on seed or series funding because these represent significant milestones for startups. Yet, companies must manage smaller cash expenses adequately to keep running at full speed.
Among the several financing options available that can help a business get to the end of the month in the black, short-term loans are most useful to keep the operations going. Short-term loans like channel financing or working capital loans help businesses tap into the cash trapped within supply chains or give a company the cash it needs before the money tap runs out.
However, there are several factors to consider before deciding which short-term loan – working capital or channel financing – is suitable for your business.
What is a working capital loan?
A working capital loan finances a company’s daily operation. They cannot be deployed to procure long-term assets or investments but can be employed to pay short-term operational expenses. These expenses could be salary, rent, utilities, and other recurring payments.
When to go for working capital?
A company uses working capital loans to bridge the gap in its short-term liquidity. There are no stipulations on what the funds are used for, allowing companies to use additional capital where needed the most flexibly. Companies can deploy funds from a working capital loan to pay recurring expenses in case of a cash crunch. Or in seasonal business without consistent revenue all year round, working capital financing can aid navigating the cash crunch in lean periods.
For instance, some manufacturing companies could need a significant push in Quarter 4 to keep up with the increased demand from retailers. Retailers often sell more products during the fourth quarter to achieve yearly targets. Manufacturers would need to plan ahead and manage production in leaner months to meet this spike in demand. And to address this seasonality, such enterprises often require a working capital loan to pay wages, raw material costs, and other operating expenses during months where income is restricted. The loan is cyclical, and the company can choose not to draw funds during its peak sales months when cash inflows are robust.
Additional Read: Five ways working capital can work for your business
What is Channel Financing?
Channel financing is an innovative and structured finance mechanism by which a financier meets the various fund requirements across the supply chain, thus enabling a sustainable and seamless business flow along the arteries of the enterprise. Channel finance allows corporates to liquidate their receivables instantaneously, making it practically a cash sale. On the other hand, the buyer gets credit for a stipulated duration to liquidate inventory before repayment.
When to use Channel Financing?
2021 has begun on a positive note as demand is slowly rising back to the pre-covid levels. Several companies may be looking to recover their lost business by capitalizing on increasing demand in the next few months. Channel finance could be an excellent solution for businesses to meet this sudden incremental need to purchase inventory from select corporates and cash-in on the demand.
Additional Read: How Can Channel Financing Help You Manage Your Supply Chain Better
Channel financing is a working capital loan, too, as it is a short-term lending offering. However, enterprises can only avail of it to purchase inventory from corporates providing the Channel Financing program.
Tata Capital provides channel finance to help distributors, dealers, and retailers purchase goods from leading corporates. With Tata Capital Channel finance, customers can access unsecured working capital loans in no time to stock up their inventory and grow their revenue.
Channel financing is a solution designed to cater to the needs of every supply chain stakeholder. While working capital financing is a short-term loan that provides funds to manage a company’s operational requirements. Before setting out to apply for a working capital loan or channel financing, study and evaluate both options, the availability and nature of funds, and how they would be useful for the business is essential. Reach out to our trade finance experts to address your queries related to working capital loans.