Understanding Working Capital Finance

Understanding Working Capital Finance

Numerous funds are required to setup a business and get it running. Working capital funding is the cost of funds that is used for the purpose of financing a business. Business cannot do without working capital financing. The cost of capital is dependent on the financing mode used for the purpose. It means the cost of equity if business is financed through equity only or cost of debt if debt was the sole means of finance.  Numerous companies use the combination of equity and debt for capital funding.

Working Capital Finance:

It is the measure of the efficiency and the short term financial health of a business.  Method of how to find working capital is stated below and can be understood by the following equation:

Working Capital = Current Assets – Current Liabilities

The ratio of the working capital finance shows whether the company possesses the short term assets to cover the short term debts of the business. Anything below 1 indicates negative WC and anything over 2 indicates company is not investing in the excess assets. The ratio between is 1.2 and 2.0 is considered adequate. If company fails to exceed its current asses from its current liabilities, it could be well on its way to disaster and have difficulty in paying back the short-term creditors.

Working Capital Loan:

The loan that is taken for the purpose of financing the daily routine operations of the business is called working capital loan. Working Capital Finance loans cannot be used to make long-term investments or buy long-term assets. They are used instead, to cover wages, accounts payable etc.

Those businesses and companies that have cyclical sales or high seasonality usually rely on the working capital loans to help the business in time of reduced business activity. The cash available for financing the short-term operational needs of a business is called working capital.

Sometimes companies lack in having sufficient cash on hand or asset conversion for covering the daily operational expenses, taking working capital loan acts as basic corporate debt borrowings which are utilized by the business to finance the daily operations of the company.

Businesses that do not have a sound source of funding may stagger under the weight of its own debt and capital funding is the fuel on which a business can run successfully. Different options can be chosen by the business in order to gain capital funding.

Sometimes, more than one option can be used for capital funding. The selected mode of funding shall depend on the business’ desire to remain in debt, solvency of business owners at time of founding of company and the amount of money business shall need to launch itself and maintain through different situations.

Capital Fund Financing Program CFFP:

Under the Capital Fund Financing Program, private capital may be borrowed by PHA to renovate, improve and pledge depending on the availability of adoptions, a part of its future annual capital funds in order to make the timely debt service payments for conventional bank loan transaction or a bond.

Generally, a time period between 60-90 days can be expected by the PHA.  The overall timeline for review shall rely on the completeness of the proposal as well as the responsiveness of the PHA team. The PHAs are advised to anticipate and the unforeseen issues that might arise. They are expected to act accordingly if unexpected circumstances surface during the review process so that they are able to recover and come out of it efficiently and timely.  The bonds/loans happen to be obligation of the PHA and. The HUD does not insure or guarantee these bonds or loans.

The obligations of PHA are also subject to the availability of appropriations by the Congress and compliance with both the regulatory and statutory requirements. A written approval by the HUD is required for all the capital funding transactions that pledge, obstruct or provide security interest in other property or public housing assets including capital funds and use them for debt payment or financing costs.

Working Capital Finance

A PHA is required to submit a financial proposal in order to get the HUD approval. It includes a term sheet, complete financial documents and justification for use of the capital funding for financing. The guidelines for CFFP program are listed below:

  1. PHAs should get an approval form the Deputy Assistant Secretary, Office of Public Housing Investments.
  1. All pledges tend to be subject to the availability of appropriations. A PHA could pledge up to 100% of any projected replacement housing factor grants for the payment of debts only if not more than 50% of its all projected capital funding grants (including RHF and formula funds)are pledged.

Normally, not more than 33% of the current annual capital funding grant of PHA adjusted any proposed, disposition or planned demolition or other activity would outcome in reduction of PHA units count or reduce CFP funds.

  1. The term period for the program is generally no more than 20 years.
  1. Normally, a PHA should at least be designated a Standard Performer under the Public Housing Assessment System Designation. And a standard performer on the management and financial indicators. HUD shall consider the requests from distressed PHAs if they are able to show sufficient skills in both management and financial capability and control to successfully undertake its CFFP.
  1. As the proceeds from the CFFP transactions are generated using capital funding and pledge, the CFFP proceeds are considered for all purposes by the HUD. PHAS that follow any of the CFFP transaction are required to adhere to the regulatory and statutory requirements related to the capital funding program regarding the implementation and development of their CFFP proposal.

The financing tends to be subject to the compulsory prepayment to obligation end date and expenditure end date of CFFP proceeds to the extents deemed critical for the CFFP proceeds to comply with the section 9(j) of 1937 Act. (42 USC 1437g(j).

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