Put simply, working capital is the money that keeps a business running. In good times, you may not think about working capital much, but there can be times when working capital runs low, putting stress on the business. Every business has its own permanent working capital needs. There can be also be times when a business experiences a temporary financing need. Let’s take a look at working capital and the difference between permanent working capital and temporary working capital.
Calculating Your Working Capital
If you subtract liabilities from assets, you end up with working capital. This is the money you have left over, after paying bills, to run the business operations. When calculating working capital, you include all your assets, including accounts receivable and inventory. You must factor in how long it takes to receive money from customers and how long it takes to convert your inventory into a receivable or cash. Liabilities are all of your costs. Calculation of liabilities takes into account how long it takes for you to pay your outstanding invoices.
Temporary Working Capital
After performing a working capital analysis, you may find that your business needs help with cash flow at certain times of the year. For example, during the holiday season when additional inventory and staff may be required ahead of the rush. This is temporary, meaning you just need a bridge loan to fund the ramp up and can repay it soon after, when the cash starts rolling in.
Permanent Working Capital
Another type of working capital need is known as permanent working capital. This is the amount of money needed to make liability payments before you are able to convert assets or invoices into cash. This is known as the operating cycle and many businesses require an ongoing, sometimes permanent, solution to this gap.
Why You Should Know the Difference
There are many options for small business loans, so understanding your own unique situation will help you to make the best decisions on how to get a business loan. Temporary working capital needs may be met by short-term business loans that often come with a high interest rate or fees. But, permanent working capital loans can be long-term sources of finance, which are generally cheaper than short-term loans.
Financing your working capital strategically, whether temporary or permanent, will save your business lots of money in interest charges. If you want to know how to get a business loan for permanent working capital, start with ViewRidge Funding. Just Give us a call at (888) 241-7241 or fill out our Get Started form today to find out your options for permanent working capital loans.