Business Loans

Your Guide On Working Capital Loans And How To Get One

Nov 07, 2022 • 10+ min read
Business owner looking into working capital
Table of Contents

      Your business needs positive cash flow to survive. But making more than you spend every month doesn’t give you the full picture of your business health. A business may be cash flow positive but declining overall.

      This scenario is where working capital comes into play. If cash flow is a picture of how your business is performing in the short term, then working capital is a snapshot of its long-term health. Increasing your working capital improves your ability to impact the ongoing growth of your business.

      Businesses with negative working capital slowly fade away while businesses with positive working capital have the assets they need to grow into a stable business.

      So what exactly is working capital?

      What Is Working Capital?

      Simply put, working capital is the difference between the liquid assets and liabilities of your company. These assets are required to be liquid enough to sell within a year.

      The type of assets that typically constitute working capital include:

      • Property
      • Inventory
      • Cash
      • Marketable securities
      • Notes receivable

      Liabilities factored into working capital include:

      • Wages
      • Rent
      • Utilities
      • Taxes
      • Accounts payable

      You can find your business’s working capital by taking the sum of your current assets and subtracting your current liabilities. A more telling number is your business’s working capital ratio. This ratio is the sum of your current assets divided by your current liabilities. A number below 1 means you have negative working capital, whereas a number above 1 means you have positive working capital.

      When factored together, your working capital sum will either show a surplus or a deficit. A surplus of working capital means that your business processes can flow uninterrupted. If your inventory is liquid—meaning you’re able to sell your stock quickly—you’ll see an increase in working capital.

      Working capital represents assets that are working for your business. When your working capital is positive, your assets outpace your liabilities, generating positive growth in the long-term.

      When working capital is at a deficit, the progress of your business is outpaced by growing debts and liabilities. Working capital inefficiencies often happen when demand is unpredictable. Here’s how:

      Working Capital Inefficiencies

      Say you’re selling an expensive mattress that most consumers can’t afford to purchase with a lump sum. You’d likely offer a payment plan where consumers pay a portion of the mattress’s price every month.

      What happens if the demand for your mattresses skyrockets unexpectedly, but you don’t have enough liquid capital lying around to purchase excess inventory to fulfill the demand for orders because so many customers are paying over time? This financial stalemate represents a working capital inefficiency in your business—one that severely impairs your sales growth.

      These kinds of working capital inefficiencies can cripple your business in the long term and cause you to lose much-needed revenue.

      But don’t worry—for the duration of this guide, we’ll outline places to go and products to use when you want to increase your working capital. By the time we’re done here, you’ll understand how to invest in the long-term growth of your business in a way that mitigates and eliminates working capital inefficiencies.

      Let’s get started.

      What Is A Working Capital Loan?

      A working capital loan is a business loan used to cover everyday business expenses, such as as payroll or inventory costs. It is generally not used for long-term investments such as purchasing property. A working capital loan can help bridge working capital inefficiencies, so your business can continue to focus on long-term growth.

      Pros And Cons Of Working Capital Loans

      There are several benefits to working capital loans. The most obvious is it gives your business more flexibility to focus on long-term growth instead of being limited by the amount of cash you have on hand. A working capital loan can also help you weather unexpected dips in sales.

      As with any loan, failure to make loan payments can hurt your credit score, and many loan products require that the business owner provide collateral to secure the loan.

      If you haven’t heard of “working capital financing,” you’re not alone. Lendio’s financing director Tanner Cupello explains this quick-to-fund financing option for small businesses that can be used for everyday operating expenses, like payroll, supplies, rent, and more.

      Are You Ready for Working Capital?

      The real key with working capital is flexible funds that you can use to improve your business, stabilize your operations, and capitalize on unexpected opportunities. That’s why our team at Lendio has made it a goal to offer loan products that meet the working capital needs of any business.

      While there are plenty of other financing routes to take, few offer the flexibility of a business credit card or line of credit. Almost none offer the speed and urgency of a merchant cash advance. Best of all, you can access these financial products by spending only 15-minutes filling out an application.

      An application that we send to our proprietary network of over 75 lenders who compete for your business. So if you’re ready for the offers to start pouring in, get started on the application today.

      Quickly compare loan offers from multiple lenders.

      Applying is free and won’t impact your credit.

      About the author
      Andrew Mosteller

      Andrew Mosteller is a freelance writer and regular contributor to Lendio News. His upbringing in an entrepreneurial family nurtured a passion for small business at a young age. Andrew's father, an equity fund manager, taught him the ins and outs of investment financing. Now, Andrew spends his time writing copy for business owners, helping them expand and advertise their unique brands. He's also studying Strategic Communications at the University of Utah. When Andrew's fingers aren't glued to the keyboard, he spends his time reading, podcasting, composing music, and bombing down the ski slopes.

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