Economy Events

Working Capital : What is It and How is It Determined?

Working Capital has been defined in several different ways. Some call it the lifeblood of a going concern. Others define it by describing it as the amount of seed money invested in a business for purposes of meeting the day-to-day needs of “a going concern.” Some others refer to Working Capital as the Net Worth of a business, using the formula:

Working Capital = Total Current Assets – Total Current Liabilities

Yet for those who have very little or no idea about Current Assets and Current Liabilities, Working Capital as a concept may be difficult to discern. .

Understanding the Concept of Working Capital Elements

A business is a “:going concern” if it is in constant operation to generate sales. As such, its Working Capital will keep the business running continuously. The value of which is determined by the Current Assets and Current Liabilities of an entity.

Current Assets

Available business funds used to support the selling activities and to purchases sellable goods are simply labeled as Cash. If the business is a trading concern, the sellable goods are called Merchandise Inventory. Inventory may have other descriptions, such as Raw Materials, Raw Materials in Process or Finished Goods, Inventory by any other name is a Current Asset since they will likely be sold and converted into Cash within a short period of time.

In some instances, goods are sold on credit; denoting that the sale will not immediately increase available Cash. in such cases, sales on credit be distinguished by being classified as Account Receivable. Ideally, Accounts Receivables are collected within a short period of time so that they will immediately become part of Current Assets. .

When a “going concern” is having a good run, more than enough cash may be amassed. If so, it is a good practice to place extra funds in short-term investment instruments such as stocks, or bonds. That way, even excess money can have a chance to grow while invested. Collectively, they are classified as Marketable Securities. They can easily be sold or converted into cash, they also form part of the Current Assets of the business.

Take note that for an asset other than Cash, to form part of the Working Capital of a business, it must be Current or one that can be easily liquidated in cash form.

Current Liabilities

Current Liabilities include trade credits that allow businesses to procure inventory and other business necessities on short-term bases. Credit purchases do not earn interest for as long as the obligations are settled according to the terms of credit, which can be as short as 10 days or 180 days at the most.

In cases when a business is unable to generate additional cash funds by way of sales, fund may be secured by way of short-term loans. Payment terms include interests, and amortized monthly up to 12 months. Inasmuch as there is a need to settle obligations periodically in less than a year, they are also classified as Current Liabilities.

Total Current Liabilities are then deducted from the Total Current Assets when determining how much Working Capital is being used by a business.

The Risks Of Peer-To-Peer Lending

Peer-to-peer lending, also known as P2P lending such as the mintos review, is a popular alternative that is without the use of a traditional credit union.  Majority of loans given by P2P lenders are personal loans, wherein borrowers could use it for different of purposes and intents from consolidating debts to starting a small business, or for home improvements. Peer-to-peer lending occurs when individual investors are able to directly lend to borrowers, frequently via online P2P lending platforms.

It’s worth assessing P2P lenders if you are in need of a loan. Rates for P2P loans could be remarkably low, especially if your credit standing is good.  And although your credit standing isn’t perfect, you may still be approved for a loan that’s affordable with these lenders online.

The investor and the borrower both gain from the P2P model. As the lender obtains higher interest rates, the borrower gets lower interest rates as compared to what would be offered if either one went through a credit union or commercial bank.

What are the risks?

The major concern for each investment decision is the risks versus the rewards. But, with the advertising rates of peer-to-peer lending platforms which range from 3% to 19%, the rewards could easily and clearly be envisioned. Yet, the challenge correlates to evaluating the risk level that is acceptable or good enough to the reward. The nature of lending or loaning money to businesses and/or individuals forms unique possibilities of risks compared to the usual asset classes that savers or investors had better be aware of. It is an investment to be loaning money via P2P lending platforms; hence funds aren’t protected by insurance firms like the FSCS. Eventually, without coverage, the capital and interest of investors are at risk.

  • Market Risk

These risks associate to macro-economic factors that might affect the capability of a borrower to pay off their loan or for the investment capital to be regained post default. This is similar to set income investments, there also exists an interest rate.

  • Interest Rates

If the rate of interest were to increase, the rate of interest paid off by a borrower may not look appealing as compared to other types of investments.

  • Credit Risk

Borrower default might be caused by economic factors or by a poor initial credit choice. Investors are recommended to differentiate across a huge quantity of borrowers to make certain that the effects of the defaulting of one borrower are nominal on the investment as a whole. Even after diversification, a large number of borrowers defaulting on their loan obligations continue to be a risk.

These are just three of the risks of investing in the sector of peer-to-peer lending. The illiquid make-up of lending implies that investors ought to be ready to commit for the duration of the term or be informed of the secondary market of the P2P platforms. A Borrowers who default on their loans is an evident risk that investors have to evaluate.

Starting and Growing a Business : Important Things to Consider

So you have a great idea for a startup business and the only thing that is holding you back is your need for additional business funds. First off, start by being a wise investor yourself, by exposing you and your assets to as little risk as possible. Do not throw all your eggs into one basket, so to speak, once you decide to turn your business idea into a full fledge business venture.

Just a piece of unsolicited advice, start small, maybe as a home-based business at first. As much as possible, veer away from the notion of securing a business loan to avoid being burdened with interest expenses and other financing charges. Your initial goal is to prove the viability of your business, then evaluate other aspects that need room for improvement or expansion.

Once your startup business picks up, and shows signs of potential growth, then you will have made your startup business a venture worth investing on. That is the first thing that most most business fund providers look into when looking for a good investment product.

At that stage, it would be unwise to wait until you have raised additional funds for expanding your home business, into something that has more form and structure as a business enterprise . Your goal this time is not lose the momentum for business growth, even if you have to seek additional funding from outside investors or financing institutions.

Potential Sources of Funding for Growing Your Startup Business

 

Love Investors

When looking for outside investors, look for them first in your circle of family and friends. If there is anyone willing or interested, let them in as investors. Doing so will put less strain and money-pressure on you and your business. Agreements with love investors are after all less constricting, when it comes to repayment terms and conditions.

However, try not to destroy their faith in you, because it will do you more harm than good. Building a good reputation in handling business obligations, even with informally contracted love debts, is valuable; especially if you want to grow your business further.

Banks and Other Financing Institutions

Keep in mind that banks and other lenders often require a specific period in which you have already operated a business even with minimum success. Lenders also want to make sure that they will be investing on a venture that has great potential to pay, not only the principal but also the interests that come with financing. This is why business reputation is worth more than the dollars you earn or keep by not honoring your obligations and commitments.

SBA Microloans

If you are a member of a minority group, or a business woman or a veteran, checkout your eligibility for a microloan being extended by the government’s Small Business Administration (SBA). The SBA is actually a program that coordinates with non-profit, community-based lenders who are willing to grant loans ranging between $500 and $50,000 at a minimum interest rate and up to a maximum term of 6 years.

Still, in light of the easy terms by which microloans are granted, you have to apply for one as early as possible. There are many like you, also seeking to obtain funds for a startup business, which means it will take time before your application gets processed.

Business Capital Investors

Business capital investors are different from lending institutions because the funds they intend to infuse will be in the form of semi-fixed investment, such as having a share in the ownership of a company, usually as a stockholder or as a bondholder.

Although they have greater capacity in providing larger funds, they also want to make sure their investments will grow by taking part in the decision-making processes. In case they are not satisfied with how the business is being run, capital investors have the option to pull out their investment when deemed necessary.

STARTUP FUNDING EXPLAINED - EVERYTHING YOU NEED TO KNOW
Learne more about business and investment from this... Life of Starting a Startup - such an informative and fun to watch video. This explains the mechanics well, implementing is easier said than done. Applies to tech startups that have a ridiculously high market potential.
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