Working capital is essential to any operation that intends to stay in business for an extended period of time. Without proper management of working capital—the capital used to finance everyday operations—you risk putting your business in serious financial trouble.
Managing business finances is a constant balancing act; you need to be sure you have enough capital to cover every day needs, but you don’t want so much sitting around that you aren’t investing it properly in growing your business. Even then, to keep your finances balanced and take advantage of business opportunities, you may need to borrow additional capital.
What exactly is funding working capital? And how does a merchant account provider fit into the equation?
What is Working Capital?
Working capital, according to Investopedia, is “a measure of both a company’s efficiency and its short-term financial health.”
What does that mean? It’s a measure of how much money you have left to pay for business operations after you’ve accounted for all your short-term business liabilities. The calculation is simple:
Current assets – current liabilities = working capital
Current assets include all the assets coming into your business that can be converted to cash in the next year. Obviously, this includes everything already in the form of hard cash, as well as assets such as inventory and accounts receivable.
Liabilities, as you might imagine, include all the debts you’ll have to pay in the next year. Short term debt (debt due within the year), accounts payable, and taxes payable all count as liabilities. Debts that are paid out over a term longer than a year, such as long-term loans and mortgages, are not included in this number.
Positive VS Negative Working Capital
Ideally, your current assets outweigh your current liabilities. This is called positive working capital. On the other hand, if the sum of your liabilities is larger than the sum of your assets, you have a negative working capital.
Working Capital Liquidity
There is one more thing to consider regarding working capital: its liquidity. Not all of your current assets are in the form of cash. Great as having soon-to-be-money is, you cannot pay the bills with inventory or unpaid invoices.
How a merchant account provider can help you and your working capital
Working capital loans are used for a specific purpose – paying for everyday business operations – but there are many different scenarios in which you might have to borrow money. This is where a merchant cash advance from a merchant account provider (such as FAM) comes in. There is no crazy payment deadline, no huge interest rate, and even bad credit score merchant are eligible. This is the safe – and smart – choice for merchants when they are in need of extra funding.