SOURCES OF WORKING CAPITAL FINANCE: AN EXPLORATORY STUDY ON BANGLADESHI COMPANIES

Published Online: 20 July, 2023 || Published on Print: 20 July, 2023

Abstract

Cost efficient and timely sourcing of funds to support the working capital (WC) needs of a company are essential for ensuring the continuity of operations and profitability of any company. Hence, a thorough understanding about potential sources of working capital finance (WCF) is of significant importance. This research therefore, investigates the sources of working capital finance and their relative proportions in meeting WC requirements. The research also delves into identifying factors considered by the companies while choosing from alternative sources and the challenges/constraints faced by the companies in sourcing WCF. Based on descriptive and thematic analysis of the data collected from interviewing the finance managers of 21 selected (purposively) manufacturing companies, the study reveals that trade credit (or credit purchase) is the most significant source of WCF followed by short-term bank loans, collection of dues, over drafts and revolving credit respectively. The results support the pecking order hypothesis (POH) of finance in the sense that companies follow an order in choosing the sources of WCF- starting with trade finance, which is a spontaneous source of finance, followed by short-term debt. However, the results contrast the hedging principle of WCF which suggests permanent needs of WC should be financed by long-term sources like equity (internal or external) and long-term debt; only the temporary or variable needs of WC should be financed by short-term sources of fund. Among the factors influencing the choice of WCF sources, cost, availability, amount, relationship with the lender, flexibility, and speed have been found to be of high importance. The study has compared practices with the existing theories of finance and found some discrepancies (mentioned above) between the two, which intrigue further research in the area and thereby have the potential to contribute in new knowledge creation. By identifying some alternative sources coined as ‘bootstrap financing’ and a number of under-explored sources of WCF, the study opens up opportunities for other companies as well as financiers.

DOI: https://doi.org/10.58964/JBA44N106