Cash Finance vs. Running Finance: A Comparison

Businesses require capital for various purposes, broadly categorized as short-term and long-term needs. Two common forms of short-term financing are cash finance and running finance. While both provide immediate access to funds, their structures, uses, and suitability for different business requirements differ significantly.

Cash Finance

Cash finance, also known as a term loan or fixed loan, provides a lump sum amount to the borrower. This amount is typically used for a specific, pre-defined purpose, such as purchasing equipment, covering a large one-time expense, or funding a project. The loan is repaid in fixed installments over a predetermined period, which includes both the principal amount and interest charges.

Key characteristics of cash finance:

• Fixed Amount: The borrower receives a fixed amount of money at the outset.
• Specific Purpose: The loan is generally intended for a particular project or expenditure.
• Fixed Repayments: The repayment schedule is fixed with predetermined installment amounts.
• Predictable Cost: The interest rate and total repayment amount are usually known from the start.

Cash finance is suitable for businesses that need a large sum of money for a specific project with a clear repayment plan. It offers predictability in terms of cost and repayment schedule, making it easier for financial planning. However, the borrower pays interest on the entire amount from day one, even if the full amount is not immediately needed.

Running Finance

Running finance, also known as a line of credit or overdraft facility, provides access to a revolving credit line. The borrower can draw funds up to a pre-approved limit and repay them as needed. As repayments are made, the credit line is replenished, allowing the borrower to draw funds again. Interest is charged only on the outstanding balance.

Key characteristics of running finance:

• Revolving Credit: The borrower has access to a credit line that can be used and repaid repeatedly.
• Flexibility: Funds can be drawn as needed, offering flexibility in managing cash flow.
• Interest on Usage: Interest is charged only on the outstanding balance.
• Variable Repayments: Repayments can be made as per the agreed terms, offering some flexibility.

Running finance is ideal for businesses that require flexible access to funds for working capital needs, such as purchasing inventory, paying suppliers, or managing seasonal fluctuations in cash flow. Its flexibility allows businesses to manage their finances efficiently and avoid paying interest on funds they don’t currently need. However, the interest rates on running finance can be higher than those on cash finance, and there might be additional fees associated with maintaining the credit line.

Conclusion

The choice between cash finance and running finance depends on the specific needs of the business. Cash finance is suitable for funding specific projects or large expenses with predictable repayment schedules. Running finance, on the other hand, is ideal for managing working capital and providing flexible access to funds for day-to-day operations. Understanding the differences between these two forms of financing is crucial for businesses to make informed decisions and optimize their financial strategies.