Working capital is the money a business needs to cover its day-to-day operations — payroll, inventory, rent, and other operating expenses — between the time money goes out and the time revenue comes in. It's the lubricant that keeps the engine running.
Most businesses eventually face a working capital gap. Here's how to think about it and the best ways to address it.
How Working Capital Is Measured
Working capital = Current Assets - Current Liabilities. Current assets include cash, receivables, and inventory. Current liabilities include accounts payable, short-term debt, and accrued expenses. A positive number means you have a cushion. A negative number means you're stretched.
But the balance sheet snapshot is only part of the picture. Cash flow timing matters as much as the net number — a business can be technically solvent but consistently short on cash if clients pay on 60-day terms while expenses are due weekly.
Common Causes of Working Capital Gaps
- Seasonal revenue fluctuations — high expenses in slow months
- Slow-paying commercial clients
- Rapid growth — more orders require more inventory before revenue arrives
- Large upfront expenses for a contract or project
- Unexpected costs or emergencies
Financing Options for Working Capital
Business line of credit: The most flexible option. Draw when you need it, repay when cash flows in. Rates vary by lender and credit profile. Best for recurring, predictable gaps.
SBA 7(a) working capital loan: Longer terms (up to 10 years) at capped rates. Best for businesses that need a larger amount over a longer repayment period rather than a revolving facility.
Accounts receivable financing: Converts outstanding invoices to immediate cash. Best for B2B businesses with slow-paying commercial clients. Learn more about AR financing here.
SBA CAPLine: A revolving line of credit backed by the SBA, specifically designed for working capital needs. Draws are tied to receivables or inventory.
Term loan: A lump sum repaid over a fixed period. Less flexible than a line of credit but useful for a defined working capital need with a known repayment timeline.
When to Act
The best time to secure working capital financing is before you need it. Lenders underwrite your business's health — if you're applying in the middle of a cash crunch with declining revenues, your options narrow significantly. Setting up a line of credit during a strong period means it's there when you need it.
Don't use long-term debt for short-term needs. Financing a temporary cash flow gap with a 10-year term loan is expensive. Match the financing term to the underlying need — short gaps call for revolving credit, structural capital needs call for term debt.
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Talk to KQT AdvisorsKQT Advisors is a commercial loan broker and does not make lending decisions. All loan approvals, rates, and terms are subject to lender underwriting. Information in this article is for general informational purposes only.
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