## Financing of Working Capital — Introduction
After estimating the working capital needs, the finance manager must arrange funds to meet them.
### Types of working capital (and how each is financed)
| Type | Meaning | Typically financed by |
|---|---|---|
| Permanent working capital | Minimum level always needed, regardless of sales fluctuations | Long-term sources — debt and equity |
| Temporary working capital | Required only for short periods (seasonal/peak demand) | Short-term sources |
### Categories of working capital finance
1. Spontaneous sources — arise naturally during business operations (e.g., trade credit, employee credit, supplier credit).
2. Negotiated sources — require formal negotiation with lenders (e.g., commercial banks, financial institutions, the general public).
### Factors for selecting a financing source
1. Cost — expense of acquiring the funds.
2. Impact on credit rating — effect on the company's financial reputation.
3. Feasibility — practicality of obtaining the funds.
4. Reliability — certainty of fund availability.
5. Restrictions — limitations imposed by lenders.
6. Hedging approach — matching the maturity of financing with the maturity of the asset being financed.
### The Hedging (Matching) Approach
Under the hedging principle, permanent assets are funded with long-term finance and temporary/fluctuating assets with short-term finance. This balances risk and cost.