Working capital is money a business uses to keep the day-to-day operation moving.
It can help pay for things like:
Payroll
Inventory
Supplies
Rent and operating expenses
Marketing
Seasonal cash-flow gaps
Fulfilling new orders or contracts
Taking advantage of growth opportunities
The important point is that working capital isn't one specific type of financing. It can be provided through a term loan, line of credit, SBA financing, factoring, AR financing, or other financing structures. The SBA, for example, specifically allows 7(a) financing to be used for both short- and long-term working capital. (Small Business Administration)
It depends on the financing product and lender.
Alternative lenders may be able to move considerably faster when the application is straightforward and the business has readily verifiable revenue and financial information.
Traditional bank and SBA working-capital financing generally takes longer because of the additional underwriting and documentation. For example, SBA's 7(a) Working Capital Pilot requires businesses to have at least 12 months of operating history and be able to produce accurate financial statements, AR/AP aging reports and inventory reports. (Small Business Administration)
Usually, you don't give up ownership of your company simply to obtain working capital financing.
But you may have to provide:
Business and personal financial information
Bank statements
Tax returns
Financial statements
A personal guarantee
Business assets as collateral
Accounts receivable or inventory as collateral, depending on the facility
The stronger the financing product, the more documentation and underwriting you may encounter.
Working capital gives a business financial breathing room.
It can allow a company to accept a large order, cover payroll while waiting for customers to pay, purchase inventory before it is needed, or take advantage of an opportunity without draining its bank account.
Working capital isn't free money.
The business has to repay the financing, and the cost can vary dramatically depending on the product.
The biggest mistake is using short-term, expensive financing to fund a long-term cash-flow problem.
Working capital financing helps bridge the gap between the money a business needs today and the money it expects to generate or collect tomorrow.
The key question isn't simply “Can I get working capital?”
It's: “What type of working capital financing makes sense for my business, and can my cash flow comfortably support the cost?”
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Educational information only. Olsen Business & Financial Solutions Consultants (DBA - BizMoolah) does not provide legal advice. Financing, restructuring, consolidation, and other solutions are subject to qualification, availability, creditor approval, contractual terms, and applicable law.