Financing Options for Working Capital and Capital Expenditure


Financing Options for Working Capital and Capital Expenditure

Cash flow is the lifeblood of any business. Even profitable companies may face financial distress if liquidity is not well managed. Fortunately, businesses today have access to a range of financing tools—both for working capital and capital expenditure (CAPEX)—to support day-to-day operations and long-term investments.

Working Capital Financing

Effective working capital financing depends on aligning funding options with the company’s cash flow cycle, business model, and risk appetite. Common options include:
  1. Line of Credit
    A flexible facility suitable for short-term working capital needs. Interest is charged only on the drawn amount, though borrowers must manage interest rate volatility and facility renewal risk.
  2. Short-Term Loan
    Typically used to address seasonal cash flow gaps or urgent funding needs. These loans are often structured with fixed terms and predictable repayments.
  3. Overdraft Facility
    Enables businesses to withdraw beyond their bank balance for emergency liquidity. While convenient, it usually comes with higher interest rates and limited credit limits.
  4. Invoice Factoring
    Suitable for B2B companies with sizable accounts receivable. It allows early access to cash by selling invoices to a financier, though fees and potential impact on customer relationships should be considered.
  5. Supply Chain Financing (Reverse Factoring)
    Often used by large corporates with strong credit profiles. It helps suppliers receive early payment while allowing the buyer to extend payment terms.
  6. Merchant Cash Advance
    Designed for businesses with steady credit/debit card sales (e.g., retailers). This offers quick access to funds, repaid as a percentage of future sales. However, costs are typically high and repayments occur daily.

CAPEX Financing

CAPEX financing involves longer-term investments and should be matched with funding options that balance asset control, cost efficiency, and financial structure. Key alternatives include:
 
  1. Term Loan
    Common for one-time large purchases such as machinery or infrastructure. Offers fixed repayment schedules but may require collateral and impact debt covenants.
  2. Equipment Leasing
    Ideal for upgrading technology or acquiring vehicles without large upfront payments. Leasing can help preserve working capital and offer tax advantages, though it may cost more over time.
  3. Sale and Leaseback
    Frequently used in asset-intensive sectors (e.g., airlines, logistics). This frees up capital while retaining operational use of the asset, albeit with long-term lease obligations.
  4. Bond Issuance
    Suitable for large corporates, particularly in property or infrastructure development. Bonds offer access to capital markets but involve regulatory compliance and investor scrutiny.
  5. Equity Financing
    Common among startups and high-growth firms. It improves liquidity without repayment obligations, though it leads to ownership dilution and potential shifts in strategic control.
  6. Government Grants
    Available for qualifying initiatives such as infrastructure, R&D, or sustainability projects. Grants are non-repayable but often competitive and subject to strict eligibility criteria.