If you’re thinking about expanding your business by increasing inventory, hiring new employees, updating your facilities or other growth-related costs, a working capital loan might be just what your business needs. Before you look for financing, be sure that your business is ready to take that on. To do so, you need to understand what working capital is and determine if yours is in good shape.
What is Working Capital?
Working capital is an accounting equation and equals your current assets minus your current liabilities.
- Current assets can be converted to cash in less than a year.
- Current liabilities are financial obligations due within a year.
Working capital is one indicator of your company’s financial health. Loans and other debts come out of your assets. So, what you have left helps you determine if you’re ready to take on additional loans. Positive working capital is a sign it’s time to keep growing. Whereas, negative working capital indicates that you might not be able to cover current liabilities.
Working capital covers your actual operational needs, including payroll, utilities, and overhead costs. This is the
amount of money needed to keep your current business afloat. So, what’s a working capital loan?
Working Capital Loans
A
working capital loan covers short-term operational expenses. You use it to cover payroll, accounts payable and other short-term needs. If you have low or negative working capital, you can choose short-term funding to cover a cash flow gap. Typically, this is done for seasonal businesses or when you need cash to grow your operations. However, working capital loans aren’t long-term solutions.
To protect your business, only use this money to make major purchases and avoid a one-time hit to your bottom line. For example, they’re a sound way to buy equipment, build inventory or hire staff to bring in additional revenue.
Why Do Businesses Need Working Capital?
Without enough
working capital, your business lacks the necessary cash to fund operational expenses or fuel short-term growth. These expenses vary from industry to industry but may include rent, payroll, supplies, debt payments and other costs. Sufficient working capital means you can comfortably cover these costs and keep the doors open. It also gives you space to invest in your company’s growth.
Working capital is an indicator of your company’s short-term financial health. However, insufficient working capital has long-term effects on your ability to expand. So, if your current assets aren’t higher than your current liabilities, you’ll have a hard time paying back short-term loans. It may be wise to shore up your finances and cut costs before taking on additional debt that could cost you your business.
Contact Us
If your working capital is positive and you feel ready to take the next step toward obtaining a working capital loan,
apply online or
contact us at MY Company Funding LLC today. We can assist you with everything from working capital loans to short-term financing for equipment leases and other needs. Let us serve as a business consultant to help you achieve your dreams.
