Working capital is the lifeblood of a business. It’s defined as current assets minus current liabilities, so it represents the amount of cash available at any given time once the business has paid its bills, such as staff wages and supplier invoices.
Generally speaking, a business in good financial health will have positive working capital – in other words, it has more than enough assets to meet its current liabilities.
Negative working capital is not necessarily a signal that the business is in financial difficulties. For example, if a business has made a large investment in new stock or equipment, it may find itself temporarily in a negative working capital position.
The amount of required working capital is unique to each business and can depend on the sector in which they operate.
The major advantage of having a healthy level of working capital is that it gives a business more flexibility, enabling it to satisfy customers’ orders, expand and invest in new products and services. It also provides a cushion for those times when extra cash is required.
However, having too much working capital can leave less room for growth. If a business has a lot of capital tied up in unsold products, it may be time to look for new markets and reassess its sales and marketing activities.
Working capital loans
A working capital loan can give a business more flexibility by bridging the gap between customer orders and supplier payments, giving it the breathing room it needs to grow.
Overall, loans can be a helpful tool for assisting with working capital and growing your business. However, it’s important to make sure that taking out a business loan is the right decision for you. If you ever find that you are in financial difficulty, you should let your lender know as soon as possible so they can work with you to find the best solution.
Find out more about business loans at LendingCrowd.
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