Depending on the type of business, there may be a need for short-term and / or structural working capital financing.
Conjunctural working capital
The need for conjunctural financing responds to the temporary cash requirement for the purchase of merchandise, in the case of businesses; or raw materials, supplies, labor or services, in the case of production. This, in order to increase the operation of the business, as a result of the increase in demand for seasonality (school campaign, Christmas, regional holidays, etc.) or business opportunity (extraordinary orders, etc.).
The payment term for this type of financing must be in accordance with the business cycle. For example, in the case of the Christmas campaign, your payment should not exceed the month of January; and in the case of the school campaign, your refund should not exceed April. Otherwise, the diversion of funds to other activities could arise.
Separate topic deserves the maximum amount of financing by seasonality, which should be related to the expected sales growth of the business, measured as a percentage of current assets.
For example, if the current business assets amount to S /. 15,000 and seasonal sales are expected to increase by 50%. The maximum amount to be granted should not exceed 50% of current assets, that is, S /.7,500.
Structural working capital
Regarding the need to finance structural working capital, what is involved is financing net working capital (current assets - current liabilities); that is, current assets (for example: merchandise and commercial accounts receivable) that have not been financed by banks or suppliers.
As it is a structural necessity (unless the business is contracted), its financing should not be short term. However, there is no consensus regarding the maximum term to grant. Therefore, some financial institutions usually grant a maximum term of 2 years, after which the business is re-evaluated.
The question, however, is: Should we finance 100% of net working capital?
The answer is: It depends!
If it were a business with Net Working Capital = Working Capital = Current Assets, it would be recommended that the client assume a part of said financing.
Other structural working capital financing needs are those that come from:
a) The need for growth, due to the unmet demand for the products offered,
b) The requirement for more capital due to entering new markets, and
c) Product diversification.
This is due to the fact that the investment in these current assets will be permanent, at least, as long as the cause that originated the application of said funds is maintained.
At this point, the question is: How much should we finance from working capital?
The answer is again: It depends!
For example, if a commercial business has Current Assets for S /.18,700, made up of: Cash and Banks (S /.5,000), Inventories (S /.12,500) and Accounts Receivable (S /.1,200); and records Current Liabilities for S /.5,000: Could you finance 100% of the net working capital. This S /.13,700 ?.
The answer is, No !, since we would be financing 73% (S /.13,700 / S /.18,700) of the business, which is unreasonable, since we would be assuming that the business could grow 73%. Something that, at least, in the current economic situation, is illogical.
conclusion
As will be seen, the terms for financing working capital loans will depend on whether it deals with temporary or structural needs; and the amounts to be awarded must depend on the business's ability to absorb the expected growth.
Finally, the review of Current Assets should not be overlooked, in order to verify if they are profitable assets (that will generate income in the future), otherwise the analysis indicated above would be vitiated.
