working capital funding policy

Working capital can be funded either from long term capital or from short term borrowings (overdraft) or a combination of the two.

The benefit of using long-term finance is that there is less risk (an overdraft can be called in immediately; and also long term borrowing is more likely to be at fixed interest so there is not the risk of interest rate changes). However, a disadvantage of long-term borrowing is that it can be more expensive – interest rates may be higher for long-term borrowing and also with overdraft finance you are only borrowing what you need day-by-day).

A good suggestion for the funding is to borrow the long term need using long term finance, and to use short term finance for day-by-day additional needs.

(This is covered in our course notes chapter on working capital)