Working capital is the money a business uses to cover its daily expenses like utilities, supplies, payroll, and rent. A working capital loan offers your business a way to temporarily pay for these expenses when your bank account is running low.
You might think that if your business is successful and you manage its finances correctly, you could never have need of a working capital loan. But that’s not necessarily true. Maintaining a balance of cash on hand can be a challenge.
While it’s important to keep some money in reserve, you don’t want your company’s financial safety net to grow too large either. Save too much money (like Scrooge) and you could miss some valuable opportunities to invest in your business and potentially grow.
But what happens when an investment goes wrong or you don’t collect on invoices as quickly as you anticipated? What if your company’s sales cycle is seasonal and you have an unexpected expense come up during a slow income month? When funds are tight and cash flow is low, a working capital loan may help your business cover those everyday operational expenses until your business has a chance to catch up through sales, invoices, investments, or other means.
What Are Working Capital Loans?
As mentioned, a working capital loan is a type of business loan that can help when your company finds itself in a tight financial spot for whatever reason. This form of business funding isn’t used for long-term investments but rather is reserved for short-term financial goals.
Before we review the different types of working capital financing options available, let’s back up and better understand working capital itself-how it’s defined and how it’s calculated.