What Is Short-Term Working Capital

05 May 2022

What Is Short-Term Working Capital

What Is Short-Term Working Capital?

The funds that are helping you finance the day-to-day operations of your business are short-term working capital. To calculate working capital (also known as net working capital), take your business’s current assets minus any liabilities, such as accounts payable or loans. Short-term working capital includes cash, accounts receivable, inventory, raw material, and other similar items. Businesses can use this capital to pay for things like:

  • Inventory

  • Advertising

  • Employee salaries and wages

  • Office supplies

  • Rent

  • Utilities

  • Insurance

  • Accounting fees

  • Licensing 

As you can see, most of these expenses are basic requirements for businesses. Imagine trying to run a business without them! It would likely be impossible. 

What’s the Difference Between Short-Term and Long-Term Working Capital?

Long-term capital refers to the fixed and permanent assets your business holds. This might include assets such as:

  • Buildings

  • Land

  • Equipment

  • Vehicles

  • Long-term investments like stocks and bonds

There isn’t a hard and fast rule for determining when something becomes long-term capital, but it’s generally agreed that the asset must at least have a useful life of more than one year. 

Long-term and short-term capital go by a few different names that demonstrate their differences. Short-term working capital is also referred to as “circulating capital” or “cyclical capital.” This suits its meaning, as you use short-term working capital in a cycle to constantly replenish assets that are used up during your regular course of business. On the other hand, long-term capital can also be called “fixed capital.” “Fixed” is an appropriate description, as these assets usually remain with a business for years before being used up, replaced, or converted to cash. 

A business normally needs both types of capital to be successful. The long-term capital will create a foundation of steady financial growth and security, while the short-term working capital will fluctuate as a business’s needs expand and change. If your business is at a stage where it could use some extra working capital, not to worry! This is a common business need, and there are many sources to meet this need.

What Are the Sources of Working Capital?

All sources of working capital will usually fall into three categories: debt capital, equity capital, and retained earnings. Many businesses use a combination of all three to fund their working capital. For example, if a business starts seeing a negative change in net working capital due to low retained earnings, it might supplement their funding with debt capital. 

Debt Capital

Using borrowed funds to promote business growth is a common way to increase short-term working capital. Only 21% of ​​small and medium-sized enterprises in the U.S. have no outstanding debt. The other 79% have some type of debt capital, and the most common range of debt capital is between $100,000-$250,000. Conventional sources of business lending are:

  • Banks

  • Credit Unions

  • Private Lenders

  • Consumer Finance Companies

  • Friends and Family

  • Trade Credit

Debt capital can be an appealing choice for many reasons. Why? Interest is sometimes a lower cost than other sources of capital. Additionally, businesses can take tax deductions on any interest they pay to lenders. And as a bonus, debt capital can also improve a business’s credit rating.

Equity Capital 

Equity capital is earned when a business owner sells shares of their business to investors. This will give investors a degree of control over the business, which some may consider a downside of this type of capital. The more equity shareholders a business has, the more power a business owner forfeits. While this is a risky avenue for investors, they buy shares in hopes of periodic dividends and the potential to sell their shares for a profit if the price appreciates. For business owners, one benefit is that no repayment is required—but their business model must be promising enough to attract investors. This is why some businesses have to start with debt capital to first prove themselves before they can attract investors. 

Retained Earnings

Most businesses hope to generate the majority of their profit from retained earnings. This capital is the net income profit (or loss) from selling products or services minus any dividends paid to shareholders. Business management will typically decide how much of these earnings will be retained and how much will be paid in dividends. If the business is focusing on growing, they might retain a higher percentage of earnings to boost development.

A business with effective working capital management will carefully balance all sources of short-term working capital. Still, even with dedicated planning and hard work, unexpected circumstances (we’re looking at you, COVID-19) can hurt or even remove one or more of these sources. Whatever the reason, business lending is sometimes the best and occasionally the only option available to generate working capital. If you’re looking for short-term working capital, you’ll find the perfect solutions with Backd.

Backd: Your Friendly, Flexible, No-Collateral-Required Business Lender

Whatever the reason is that you find your business a bit short on working capital, Backd has got your back. We offer funding from $10,000-$2,000,000 and term lengths up to 14 months. Why choose Backd over a more traditional source of lending, like a bank? Many small businesses find they are ineligible for the stringent requirements that these lending sources typically have. And besides, the application process is always a hassle and the turnaround time might take longer than you can afford.

Our application process only takes about 10 minutes, sometimes less! Once your application is approved, you’ll have money in your hands to use within three days. And we don’t force you into a payment schedule that suits us. Instead, you can adjust your payment schedule for daily, weekly, or monthly payments. 

Small businesses are the backbone of our economy, and we are passionate about supporting them. In fact, we have already provided $100 million of financial backing to our clients. If you need a short-term working capital solution, apply today!

Still have questions? Contact us for all the answers.