Working Capital 101

Understanding Working Capital Loans

Depending on your background, your experience, or even which movie you’ve watched recently, topics like finance, lending solutions, or working capital loans can sound pretty boring.

Or if you’re in the know, they might be as exciting as game seven of the World Series.

Of course, most people who deal with finance every day are no “Wolf of Wall Street” Jordan Belfort—and that’s probably a good thing. The fact is, unless you run a hedge fund or work in banking, most business and company owners are more focused on operations than they are on finance.

That makes sense because operations can be all-consuming. When it comes to hundreds or thousands of day-to-day details and details that make or break your enterprise, that’s understandable.

But if operations are the machine gears, finance is the lubricant.

Without a strong grasp of cash flow, debt, liquidity, financing options and the fiscal realities that add up (or don’t add up) to a healthy big picture, enterprises flounder.

Fair Enough… but financing?

We get it.

If you’re untrained or if you struggled with math in high school, finance can seem like a foreign language. It’s hard, even impossible to understand but probably worth trying. And good luck trying to use it and stay fluent in it.

The good news is that knowing a few key principles of finance is enough to get you started. Stacking those principles on the knowledge that you’re asking the right questions can lead to sound decisions for your business.

For entrepreneurs, owners, and anyone who knows the aim of their game is working capital to keep their company moving or invest in a new opportunity, we recommend getting started with one financial topic: working capital loans.

Furthermore, we recommend getting a good, solid grasp on:

  • What a working capital loan looks like. 
  • Different types of working capital loan solutions.
    Traditional loans from banks versus financing solutions that bank on inventory, invoices, or tangible assets.  
  • How to calculate your working capital needs.
    Trust us… it’s pretty easy. 
  • Situations where a working capital loan makes sense, given all the options.

Knowing your way around a working capital loan goes a long way toward sound, common-sense decision-making: the kind that builds momentum.

The Basics

Even if you’ve got this one dialed, there’s nothing like a good, textbook primer.
Working capital loans are loans taken to finance a company’s everyday operations—not its future investments or acquisition of long-term investments.

If you’ve just landed a contract to pour concrete at a dozen locations, and if you’ll need cash flow to break ground, pay your crew and get materials moving before your client cuts you a hefty check…a working capital loan is probably what you need.

The key here is operational costs, not necessarily loans for future expansion and buying new, stronger, equipment… as exciting as that is. For cash infusions that keep them afloat, most businesses turn to bank loans, lines of credit, or even U.S. Small Business Administration (SBA) loans.

Outside of those options, and when cash flow is needed to keep or build momentum, owners and entrepreneurs can get working capital through a number of solutions like the ones we offer at Garrington Capital.

Depending on their type of business, lending options might look like:

  • Invoice factoring: loans based on tangible assets like accounts receivable, and credit-worthy invoices.
  • Asset factoring: revolving credit based on equipment, machinery, inventory, real estate, or other tangible assets.
  • Equipment factoring: loans or credit for growing entities based on real estate or equipment assets like a manufacturing plant.

These are all great options, and they’re all helpful.

But what good are options if you don’t know if they’re the right fit for you?

How much working capital do you need, and whether or not it’s the best choice over a traditional bank loan is a key question to ask.

The Working Capital Equation

While any cash that fuels your day-to-day operations probably goes fast, the truth is it can be relatively fast and easy to get.

But again, you have to know what you need, what your options are, and the best option among all the alternatives.
In short, and if you think of working capital like an equation, it equals the value of current assets minus your current liabilities.

If you’re running a million in current assets (cash, stock inventory, basically anything liquid, that can be turned into cash), but you owe four hundred thousand in short-term liabilities, then your working capital is six hundred thousand dollars.

As Sherlock Holmes might say, it’s elementary, my dear Watson.

If that seems too simple, don’t worry: it gets harder. In fact, if you want a more robust understanding, here’s an article we recommend on the myths and realities of working capital.

Fortunately, compared to traditional bank loans, a working capital loan is easy to get. Usually, there’s less red tape and the underwriters are often more experienced troubleshooters… which means they might even cut through your problems faster to get a signature on the dotted line.

Hold ‘em Or Fold ‘em?

So working capital loans can be got faster than you thought.

So they can be easier to get than traditional bank loans.

So what?

If I’m a growing business and I need to maintain cash flow, why would I consider one over a traditional banking loan?
Great questions… and while we could answer from our own experiences and with testimonials from the entrepreneurs we’ve helped, here are some straight short answers from an article in Forbes Magazine.

Along with some sample recommendations for working capital loans in 2022, Forbes suggests finding a working capital loan if your business…

  • “Needs money to cover payroll or rent until outstanding invoices are paid.”
  • Operates in an industry where sales are “seasonal, or otherwise cyclical,” with recurring troughs, or dips in revenue that follow the calendar.
  • Needs cash to keep up production during low-revenue months.

You might also look at a working capital loan if you’re growing in leaps and bounds but need cash to cover operating expenses while that’s happening.

And while there’s always a lot to comb through when it comes to fine details, it’s encouraging to know that assets like equipment, real estate, or even invoices from clients who haven’t paid you yet can be leveraged to keep your cash flow humming along.

Dotting Your I’s

If you’re going all in on a working capital loan or any solution that doesn’t involve a traditional, by-the-book bank loan, read the contract of any deal you make carefully.

As always, the devil’s in the details.

Here, and with our own experience corroborating what we see, Forbes magazine’s helpful checklist for working capital loans is pretty comprehensive.

If you’re signing on and signing over that tractor for some fast liquidity, it’s in your best interest to

#1 Prequalify if you can

Share details about your financing needs, what revenue you’ve got coming in, and what loan terms you’re looking for. Lay it all on the table, even if that means a soft credit inquiry that doesn’t impact your credit score.

#2 Figure out how you want to receive your funds

Many working capital loans fund upfront. Alternatively, you can borrow as needed, like with a line of credit.

#3 Consider repayment terms and flexibility

Know exactly what your lender expects (and what you and your lender have agreed to) concerning repayments. This could be monthly, weekly, or even daily depending on the type and terms of the loan.

#4 Watch out for additional fees

Read between the lines and confirm. The last thing you want is to be slammed with late fees, prepayment penalties, or other loan costs.

#5 Double-check your lender’s customer support options

Getting through on the phone and talking to a human is always a plus…and when it’s time for repayment, you want all the transparency, communication, and customer support you can get.

So there you go.

Like any checklist you’d take to a loan, a mortgage, or any other financial transaction with a lender, due diligence means the best experience possible without the likelihood of being surprised… not to mention a plumb line for honesty and agreement on either side.

We hope this rounds out your financial knowledge and compliments the day-to-day operational stuff that fills your inbox and voicemail.

As far as textbook definitions of helpful financing options go, working capital loans are many entrepreneurs’ starting block—the launch pad for momentum, cash flow, and scaled growth that later on becomes part of a rollicking, reputable company history.

If you’re aiming to grow your business but are consumed in the details, knowing the options that can accelerate your expansion prepares you for better decision-making.

And in the words of every superhero, with power comes responsibility.

You Had Us At Working Capital

If you’re looking for financing, then we’re all in.

We live to provide helpful, life-saving finance solutions for entrepreneurs in the trenches: those looking to scale up, build, take a risk, and put their tangible assets to work.

If working capital loans sound like a good fit for your financial needs, then give us a call.

Talk to the Garrington team to find out more.

Latest Insights

Latest News