Working capital is slightly different from capital. Capital is more of a generic term used in various ways within the business world. Working capital has a more specific meaning.
Capital is “wealth in the form of money or assets taken as a sign of the financial strength of an individual, organization, or nation and assumed to be available for development or investment.”
Working Capital is “a measure of both a company’s efficiency and its short-term financial health. A working capital ratio (current assets less current liabilities) indicates whether a company has enough short term assets to cover its short term debt.”
It’s possible for a business to have either positive or negative working capital at any point during the year. Many businesses that rely on seasonal or cyclical sales see positive working capital during the height of their busy season and negative working capital during their slow, or “off,” season. Temporary negative financial situations often arise for businesses that have negative working capital during some portion of the year, and despite the fact that they will have positive working capital by the end of the year, they have financial obligations to creditors during specific periods of time.
Examples of expenses that must be paid year-round – even during the off season when a business might be in the midst of negative capital – include payroll, insurance expenses, rent, electrical and water bills, and inventory. When businesses are struggling to pay for day-to-day operational expenses during their non-busy season, many opt for a working capital loan to help them stay afloat until their busy season begins.
What is a working capital loan?
A working capital loan is one that is not used to purchase costly assets or to make investments. Rather, the purpose of a working capital loan is to help businesses raise cash to pay for their everyday operational expenses, to satisfy their outstanding accounts payable invoices, and to meet their payroll obligations.
Businesses can face serious financial distress during slow times of the year – even when they are sure to have positive working capital by the year’s end. Despite seasonal ups and downs, all businesses must ensure they have sufficient working capital year-round to pay monthly, short-term obligations. Often, a working capital loan is a great solution for businesses facing temporary or short-term cash flow problems.
Over the course of the past several years, it has become more and more difficult for businesses to obtain various types of business loans from banks. The situation is a bit of an oxymoron – businesses in excellent financial shape that don’t need loans are able to qualify for them, but businesses that need a little bit of help have difficulty qualifying for bank loans. This is just one reason that working capital loans can be a good solution for businesses that are in need of a short-term cash influx. Unfortunately, in today’s financial marketplace despite the fact working capital loans are difficult to obtain from finance companies and other non-bank sources as well.
Need Money Fast?
The main purpose of a working capital loan is to raise enough cash to keep a business functioning and operating normally – especially during periods of low working capital. In other words, a working capital loan should not be used to pay for a business’s expansion into a new market or for the purchase of millions of dollar’s worth of equipment. If your business requires additional cash in order to meet operational expenses, a working capital loan might be a good choice if obtainable. Working capital loans are excellent for “buying time” until positive working capital can be achieved.
Editor’s Note: Greg Curtiss is President of The Invoice Bankers. Mr. Curtiss previously was a lawyer and has passed the CPA exam. He has been in business for over 25 years. You can reach him by calling 303-740-7600 or 1-888-740-1750.