If you’re a business, you need working capital to operate. Day-to-day expenses like purchasing inventory and supplies and paying salaries, debts, and bills are all taken from working capital. And these are just the general expenses that most businesses account for! What about unexpected or seasonal needs, like a holiday rush or the need to repair or upgrade equipment? These expenses, too, take working capital.
But what are the sources of working capital, and what are the differences between long-term and short-term working capital.
Also called net working capital, working capital refers to the money your business has left over after you subtract your expenses from what your company brings in. To put it another way, working capital is the mathematical difference between your company’s current assets and your current liabilities. Businesses use working capital for a variety of short-term financial needs, including purchasing supplies or inventory, paying bills or debt, and financing day-to-day expenses. Is Working Capital Short Term or Long Term?
Working capital can be both short-term and long-term. Understanding the distinction can help business owners plan and prepare for the amount of capital they’ll need to operate during expected and unexpected circumstances. Here is some information about each type.
Short-term working capital refers to the amount of cash or assets a business needs to meet short-term, immediate needs. There are a couple of primary times when short-term working capital is most crucial.
First, short-term working capital is essential for businesses such as retail or tourism that have peak or holiday seasons. Companies must account for the amount of cash or assets needed to prepare for and operate during the busy season. For example, it might cover payroll for temporary employees or the purchase of additional inventory or supplies to support added sales. Short-term working capital may also be needed to cover unexpected, immediate needs. This might include equipment repair or replacement.
Long-term working capital refers to the minimum amount of cash or liquid assets that a business needs to cover current, long-term, and recurring liabilities. There is no set amount of long-term working capital a company will need. Generally speaking, however, larger and high-growth companies may require higher amounts of long-term working capital than smaller companies.
There are two main types of long-term working capital examples: regular working capital and reserve margin working capital. Regular working capital is used to cover expected, ongoing expenses like salary, overhead costs, and the costs of supplies. Reserve margin working capital, on the other hand, is capital set aside for unforeseen circumstances; think of it like a safety net for the unexpected.
There are a number of different ways that businesses source both short-term and long-term working capital.
First, there are internal examples of working capital, including cash and cash equivalents, inventory, or accounts receivable. Sometimes, however, these aren’t enough to get you over a short hump. That’s when businesses turn to external sources of working capital for assistance. Common external sources of working capital include:
Equity Capital: Some businesses seek out equity capital or money gained from selling a portion of a company to investors or shareholders. With equity capital, remember that dividends must be paid regularly to investors. This is most often reserved for companies looking to grow their long-term working capital.
Credit Cards: Most of us have used credit cards for personal reasons, but they can also be used for immediate business expenses. Business credit cards with low to no annual fees are typically the best options.
Trade Credit: With trade credit, businesses can purchase what they need, like inventory or supplies, and pay the supplier or manufacturer at a later date.
Loans: Loans are a common solution for businesses that need working capital. Loans can be sourced from credit unions, banks, and even the government. Companies looking to qualify for a loan generally need to meet a set of requirements, including a high credit score. While loans can be a great option—especially for businesses looking for a long repayment plan—they can take days, weeks, or months to get the cash you need in your pocket.
Alternative Business Financing: For companies that have an immediate need for working capital, Backd offers a unique merchant cash advance solution. With funding from $10k-$750k and term lengths up to 14 months, Backd can cover you for whatever you need now. Upon final approval, you’ll have the money you need in no more than three days!
Backd is on a mission to empower small businesses to continue to thrive. If you have an immediate need for working capital, Backd can help. We make doing business a breeze. With competitive rates and same-day decisions, you’ll have the money you need fast.
Our application process couldn’t be easier. Simply meet the following requirements:
A business that’s at least one year old
A personal credit score of at least 600
A minimum annual revenue of at least $300,000
A history of at least 10 months of deposits in a business bank account
Questions about the process or how Backd can help your business? Reach out to us today.