Does a Working Capital Loan Affect Working Capital?
Working capital is the lifeblood of a business. It’s the money that keeps the business running and able to meet its day-to-day operating needs. There is a simple way to look at working capital, which is current assets less current liabilities. When these assets fall below the liabilities on a regular basis, it may be time to look at obtaining a working capital loan, a form of alternative lending. But, does a working capital loan affect working capital? Let’s take a look.
How to Determine Working Capital Needs
A businesses operating cycle is what determines its working capital needs. The operating cycle is the time it takes to collect receivables analyzed against the time it takes to pay invoices from suppliers. If the accounts receivable cash coming in cannot cover the amount that must be paid out to vendors in a certain time period, the business may experience a cash-flow problem, or a working capital problem. This is where small business funding can help.
How Working Capital is Affected by Business Transactions
Certain business transactions can increase or decrease working capital. Here are a few.
Acquiring Fixed Assets
If you are not seeking small business funding, but are using cash for purchases, such as equipment, there is an immediate effect on your total working capital. This is why some businesses opt for a working capital loan in order to retain a certain level of working capital on-hand.
Selling Fixed Assets
When you sell a fixed asset, you can increase your working capital, even if you sell it for a loss. The income that is received increases working capital. For instance, if you bought a piece of equipment several years ago and sold it today. Even if it as at a loss, the money coming in counts towards working capital.
Acquiring Long-Term Debt
Long-term debt is a source of working capital. The money obtained from the small business loan becomes a current asset and can be used to run the business. A working capital loan is a common alternative to traditional forms of small business funding, and one that also increase working capital.
In the long-term, your business’ net income is the main source of working capital. ViewRidge Funding can answer your questions and guide you through the process of obtaining a working capital loan. We have the tools and expertise to assist you in getting the short-term help you may need to keep your business operating through times of need. Just give us a call at (888) 241-7241, or fill out our simple Get Started form online.