“Working capital” is the cash a company has to fund its short-term operational needs like payroll, rent, and monthly utility bills. Working capital is calculated as current assets minus current liabilities. … Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. If the company has negative working capital that means that the business requires of a working capital loan to stay afloat. Working capital loans are a business funding option that can help the business to continue operating when there’s a shortage of working capital.
Sometimes a company does not have adequate cash on hand or asset liquidity to cover day-to-day operational expenses and, thus, will secure a loan for this purpose. Companies that have high seasonality or cyclical sales usually rely on working capital loans to help with periods of reduced business activity. Many companies do not have stable or predictable revenue throughout the year. Manufacturing companies, for example, have cyclical sales that correspond with the needs of retailers. Most retailers sell more product during the fourth quarter – that is, the holiday season – than at any other time of the year.
Businesses that experience seasonality in their revenues are the most common users of working capital loans. Companies often use these small business loans to get through slow periods with the intention of paying the money back when the lull is over and business is bustling again. Other small businesses might use a working capital loan to stock up on inventory before their busy season.
Types of financing include a term loan, a business line of credit or invoice financing, a form of short-term borrowing that is extended by a lender to its business customers based on unpaid invoices. Business credit cards, which allow you to earn rewards, can also provide access to working capital.
Working capital loans are great when your business is short on capital because of a temporary issue.
Here are some of the most common reasons to get a working capital loan.
If your customers take a long time to pay invoices, or your inventory takes a long time to turn over, your business’s cash flow will suffer.
Working capital loans can come in handy for seasonal businesses that need to pay business expenses while sales are slow or to purchase inventory when needed.
Working capital loans help businesses invest in growing and marketing their businesses.
A working capital loan can help you purchase new equipment, invest in training, or give you the resources you need to expand your business and take advantage of opportunities when they arise. Working capital loans can also allow you to take on projects that are a good investment in the long run but may not have an immediate payoff.
If your business doesn’t have much wiggle room for unanticipated expenses, working capital can act as a sort of cash cushion or emergency fund that helps ensure that your business can deal with the unexpected.
Since working capital loans have shorter terms typically have higher interest rates. Interest rates can vary from around 10 percent to 25 percent depending on the lending company, your credit, and your business history. The longer you’ve been in business and the better your credit score (both personal and business), the better your rate. The amount of valuable assets your business owns (like real estate and vehicles) will also impact your rate. The more assets you can use as collateral, the lower your rate and the more money you can borrow. This is due to the lending company considering you as a lower risk to lend money. If you want to find out what rate your business qualify for please contact First Down Funding.