Working Capital: The Cash That Keeps Your Business Running
Understand what working capital is, how to calculate it, and why working capital management is critical for business success.
What Is Working Capital?
Working capital is the difference between your current assets and current liabilities—essentially the cash available to fund day-to-day operations. Positive working capital means you have resources to pay bills, purchase inventory, and handle short-term obligations. Negative working capital can signal financial distress.
Working capital is crucial for business operations and is a key factor lenders evaluate.
Calculating Working Capital
Working Capital = Current Assets - Current Liabilities
| Current Assets | Current Liabilities |
|---|---|
| Cash and bank accounts | Accounts payable |
| Accounts receivable | Short-term debt |
| Inventory | Current portion of long-term debt |
| Prepaid expenses | Accrued expenses |
| Short-term investments | Taxes payable |
Working Capital Ratio
The working capital ratio (current ratio) provides another perspective:
- Current Ratio = Current Assets / Current Liabilities
- Ratio of 1.0 = break even on working capital
- Ratio above 1.5-2.0 generally considered healthy
- Very high ratios may indicate inefficient use of assets
- Industry standards vary significantly
Working Capital Financing
When working capital is insufficient, financing options include:
- Business lines of credit (most flexible)
- Working capital loans (lump sum)
- Invoice factoring (accelerate receivables)
- Inventory financing
- Trade credit from suppliers
- Merchant cash advances (expensive, last resort)
A business line of credit established before you need it provides a safety net for working capital fluctuations. It is easier to obtain when your finances are strong than when you are in urgent need.
Improving Working Capital
Better working capital management reduces financing needs:
- Collect receivables faster
- Negotiate longer payment terms with suppliers
- Manage inventory levels efficiently
- Avoid tying up cash in non-essential assets
- Monitor cash flow forecasts regularly
- Build cash reserves during profitable periods
Ready to explore your options?
See what financing you qualify for in minutes — no impact to your credit score.
Related Articles
Cash Flow: Understanding Money Movement in Your Business
Learn what cash flow means, how lenders evaluate it, and why cash flow management is essential for business financing.
Read more →Business Lines of Credit Explained: The Flexible Funding Option Every Founder Should Understand
Learn how business lines of credit work, including revolving vs non-revolving options, secured vs unsecured structures, typical credit limits, interest rates, fees, and when a LOC is the right choice for your business.
Read more →Business Term Loans: The Complete Guide to Getting a Lump Sum for Your Business
Learn everything about business term loans: how they work, qualification requirements, typical rates by lender type, and how to choose the right option for your needs.
Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
No Guarantee of Financing: Liminal Lending Co. is a business loan marketplace that connects borrowers with third-party lenders. We are not a lender and do not make credit decisions. Submitting an application does not guarantee approval or funding. Loan terms, rates, and availability vary by lender and are subject to borrower qualifications and lender criteria.
Third-Party Lenders: All loan products are offered by independent third-party lenders. Liminal Lending Co. is an Independent Sales Organization (ISO) and receives compensation from lenders for successful referrals. Terms and conditions of any loan are between you and the lender.
Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
Information May Change: Financial markets, lending regulations, and economic conditions are subject to rapid change. While we strive to keep our content accurate and up-to-date, information in this article may become outdated. Always verify current rates, terms, program availability, and regulatory requirements with lenders and official sources before making financial decisions.