People Also Ask:
When Is a Working Capital Loan a Good Idea?
This product makes sense for short-term needs or cash flow shortages that last no longer than a few months. In addition to covering expenses during a rough patch, common functions include ordering inventory, paying short-term debts, or taking on expensive projects that would otherwise compromise operational funding.
If you’re looking to finance a long-term investment, you might consider a Business Term Loan or SBA Loan instead.
How Do You Find The Working Capital of a Business?
To calculate your business’s net working capital, simply subtract your current liabilities from your current assets. The numbers that make up both parts of the equation should appear on your most recent balance sheet.
Current Assets = What your business owns (Cash, Inventory, Accounts Receivable, etc.)
Current Liabilities = What your business owes (Bills, Payroll, Loans, Accounts Payable, etc.)
Net Working Capital = Current Assets – Current Liabilities
Your current assets must exceed your current liabilities to meet short-term obligations. This, if you intend to grow your business, you should look to increase the gap between what your company owns and what your business owes.
The net working capital formula will produce an amount in dollars. Sometimes, though, looking at this number won’t immediately tell you if you have healthy working capital. Due to individual factors like industry or company size, what seems like healthy working capital for one business could represent the bare minimum for another.
The answer to your working capital ratio, on the other hand, leaves no room for uncertainty. While the net working capital formula subtracts assets from liabilities, the working capital ratio formula divides them.
Current Assets / Current Liabilities = Working Capital Ratio
What Is a Good Working Capital Ratio?
A working capital ratio between 1.2 and 2.0 usually indicates healthy working capital. If your ratio is less than one, you may face liquidity problems in the near future. A ratio higher than two, however, might suggest insufficient spending or too much unused working capital. Maybe you’ve neglected to invest enough profits back into the business or failed to spend enough money to generate growth.
What Do Businesses Use Working Capital Loans For?
Businesses use working capital loans for all sorts of reasons. For example, you might use your working capital loan for any of the following things:
- Creating a cash flow cushion
- Meeting business growth needs
- Sales & marketing costs
Of course, you can use your working capital loan for other reasons that will help your business.
Can You Use a Working Capital Loan For Hiring?
Many seasonal businesses use Working Capital Loans to hire extra staff for the busy season. Rather than waiting until the last minute, companies can hire several weeks or months before the busy season begins. This gives the new hires plenty of time to learn the ropes and prepare themselves for the upcoming surge in demand. If training is particularly vital in your industry, you might consider using your loan to invest in a formal on-boarding program. When you don’t have to worry about covering operational expenses, you can focus on less on productivity and more on educating new hires about company culture, customer service, etc.
Can I Get a Working Capital Loan with Bad Credit?
Yes, you can access all types of Working Capital Loans with bad credit. However, it’s important to remember that credit score plays a different role for different products. For example, your borrowing amount for a Merchant Cash Advance is based almost entirely on your monthly debit and credit card sales. Likewise, your credit score has hardly any impact on the accessibility of Accounts Receivable Factoring.
For a short-term Working Capital Loan, on the other hand, your credit score is indeed factored into your borrowing amount, along with your rates and terms.