Working capital is the lifeblood of a business. It’s defined as current assets minus current liabilities, so represents the amount of cash available to the business at any given time once it meets its liabilities, for example 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, on the other hand, is a sign that something isn’t working properly. For example, an excess of stock may be building up because sales have slowed down.
The amount of required working capital is unique to each business, and can depend on the sector in which they operate. Retailers generally have a greater need for working capital, as their money is tied up in stock until it is sold.
The longer that working capital is tied up in old stock or unpaid customer invoices, the less money a business will have to reinvest and sustain itself. Large amounts of unpaid invoices can affect its ability to negotiate terms with suppliers for new stock. The ability to buy stock will be hindered without sales, potentially creating a vicious cycle.
Speaking of which, the working capital cycle is the amount of time it takes to turn current assets and liabilities into cash. The longer the cycle, the longer that a business has cash tied up in its working capital without reaping the benefits. Shortening the working capital cycle, for example by collecting payments from customers sooner, will help to free up cash.
The major advantage 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.
LendingCrowd exists to help alleviate the funding gap facing so many of Britain’s ambitious SMEs, so find out how a working capital loan could help you take your business further.
Our application process is easy to navigate and our Credit Team has vast experience in assessing commercial finance applications – they aim to reach a lending decision in as little as 24 hours.
Speak to the experts at LendingCrowd today to find out how a working capital loan could help you to fund your ambitions.