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. https://www.youtube.com/watch?vHMxzFnbUTsQ 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. Most Popular Working Capital Loan Products Businesses choose to increase working capital because they need a boost. But not every business needs the same kind of boost. That’s why we’ve narrowed down some of the best lending products that satisfy specific working capital needs. Business Line of Credit If you’re looking for a highly flexible financing option, a line of credit is right up your alley. A line of credit acts as a financial safety net for your business. You have it available for when the need arises, but you’re not obliged to use it—there’s no penalty for not using it. And when you do tap into the money, it can be used for almost any business need you can dream up. Plus, you only ever pay interest on the money you use, so there’s absolutely no penalty for letting the money sit around for a bit. So how exactly can I use my line of credit? Lines of credit are very flexible and can be used for most business investments and expenditures. Popular uses include buying equipment, hiring staff, increasing inventory, adding a second location, paying invoices, installing a new employee refrigerator, and more. And because lines of credit are revolving, you can use them as many times as you want. When you repay the funds, they’re immediately available again. Thus, a line of credit is like a loan that keeps on giving. Qualifying and applying for a line of credit is pretty easy. To get your business line of credit, you’ll typically need to be in business for at least 6 months and have $50,000 or more in annual revenue. You’ll also need a credit score of 560 or higher. Your lender may ask you to make a personal guarantee, which is an agreement that the lender may be able to levy your personal assets such as a car, a house, or bank account if you default on the line of credit. Lines of credit range from $1,000 to $500,000 of approved funds for your use and can be approved in as little as a week with interest rates starting at 8%. Business Credit Card Business credit cards are desirable for many of the same reasons a line of credit is desirable. Flexibility of use, convenience, and not paying interest if money isn’t being used. In addition to the aforementioned benefits, business credit cards also have specific benefits associated with the type of card you choose to apply for: 0% Interest Some business credit cards offer an introductory 0% APR. This perk usually only lasts for 12 months, but it’s a great benefit for a year’s worth of expenditures. Once the 0% APR period is over, you’ll have to start paying interest. Bear in mind that interest accrues during the 0% period at the normal rate. The kicker is that you don’t have to pay any of that interest if you pay off your balance before the period is over. Be sure to pay off your credit card before the end of the period to avoid any interest. Rewards and/or Cash Back Many cards come with rewards or cash back programs. These kinds of programs make a lot of sense if you’re really good at paying off your balances each month. By paying off your balance regularly, you’ll be able to earn cash back, miles, or any other perks offered for free. That’s right, free money. Getting free money to invest in your business is an obvious way to increase your working capital. Flexible Applicant Requirements You’re not required to put up collateral before getting a credit card, so businesses without a lot of assets can easily access one. Additionally, the credit score requirements and other business factors are very flexible. Of course, you’ll get better rates if your credit score is good, but businesses with poor credit can still acquire a business credit card. As long as you pay off those balances faithfully, your credit will improve, and you’ll never have to pay a cent of interest. Our business credit cards range from $1,000 to $500,000. Approval and funding can come in as little as a week and interest rates start at 8%. If you’re looking for an easy way to get some extra working capital, look no further. Business Cash Advance When famine or excess demand hit a business, it’s usually unexpected. A study by JPMorgan Chase found that the majority of small businesses only have enough cash to cover 27 days of average outflows. Of the businesses surveyed, even the top 25% only had a cash buffer sufficient for 2 months. Most businesses are unprepared for the unexpected, which is where a business cash advance comes in handy. It’s working capital that comes in clutch right when you need it. Just as the phrase suggests, the funder will give you an advance on expected future revenue that you'll repay in daily or weekly payments from your business bank account. Only 24 Hours to Funding That’s right, you can have a business cash advance authorized and available to use in just 24 hours. That’s what really sets it apart from all other funding types. A business cash advance lets you borrow against future earnings to get the cash you need when you need it. Mitigate Emergencies and Maximize Opportunities Because business cash advances are so speedy, the most common uses for them usually fall into 2 categories: emergencies and opportunities. Emergencies include an unexpected increase in demand, times of famine, equipment breakdowns, etc. Opportunities include property sales, equipment sales, urgent purchase opportunities, and more. A business cash advance makes it possible to mitigate emergencies and maximize opportunities when you don’t have the cash lying around to do so. As far as working capital is concerned, a business cash advance couldn’t be a better solution for cashing in on those spur of the moment opportunities. SBA Loans Often sought after by business owners for their generous terms, SBA loans are fulfilled by regular lenders but backed by the US Small Business Administration. This means that they often come with lower interest rates. Invoice Financing Also known as accounts receivable financing, invoice financing allows you to borrow money against your unpaid invoices. By selling your invoices, you can gain access to cash quickly. This option is often appealing to business owners with bad credit and no collateral, as lenders look more at the creditworthiness of your customers than at yours. Keep in mind that a percentage of the invoice will be taken out by the lender as a fee. 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.