Alternative Financing And Application Of Working Capital In Business

Written by admin on April 30th, 2011

Alternative financing refers to non-traditional forms of supplying a business with sources of capital. Business owners usually turn to alternative financing when they do not have three years worth of gainful financial statements or do not have enough equity. There are many different sources to look to when a business needs additional funding.

One source is a private investor who contributes a significant amount of money without having to deal with a financial institution. However, the investor usually requests to be involved with business decisions and profits in return for his or her financial assistance.

A partner within the company is another source of alternative financing. Creating a partnership means an individual splits the cost of running the business alone, but must also be willing to allow the other person to take part in decisions and profits. Unlike dealing with a private investor, a partner would maintain long-term interest in the business and not be focused solely on a return.

Alternative financing also includes different types of loans or leases. Securing a contract for to work from a company that a business owner has done business with before makes banks more liable to issue loans according to the expected profit. An individual can also lease vehicles and equipment. Most leasing agencies do not require as much profitable history as other financial institutions do, so it they are an easier way to build capital.

The application of working capital in business generally refers to the statement that tracks available funds for a business. Also called the Source and Application of Funds Statement or the Cash Flow Statement, the application of working capital tracks the sources of a business’s money and how that money was spent in a particular period of time. It consists of two sections: the Source and the Application.

The Source of the application of working capital shows the resources used to accumulate funds for a business. These sources can be loans, investments, and payments made to the business. The Application tracks how the money was spent. Common applications of working capital in business are payments for rentals or loans and the purchase of assets. In order to maintain a profit, a business’s sources must be greater than its applications of working capital.

Business owners use the application of working capital to analyze the financial stability of their company. A steady decline in working capital usually means the owner needs to reevaluate the financial management of the business in order to avoid future losses and company failure. Investors, creditors, shareholders, and banks also look at the application of working capital to determine if a business is worth the risk of investing. A company that maintains steady working capital is more appealing because there is less risk of loss. Potential investors see that the business owner efficiently manages his or her finances.

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