Working capital loans

How it works

Working capital describes money supporting everyday business operations. A working-capital loan is a use-of-funds category, not one universal product. It may be structured as a term loan, revolving line, or asset-backed facility.

Where it can fit

Start with the cash conversion cycle: when suppliers are paid, how long inventory sits, and when customers pay. A temporary funding gap should be distinguished from ongoing losses or an underpriced business model.

Look closely at the trade-offs

Fast access can come with frequent payments and a short repayment horizon. Overlay the proposed debt payments on a weekly cash forecast. A product can improve today’s bank balance while making next month’s operating gap larger.

Diagnose the cash gap before choosing its label

Working capital is about the timing and amount of operating cash. A predictable seasonal gap, a delayed customer payment and a business losing money every month are three different situations. Write down when the shortage begins, its largest expected size and what event restores cash. A loan repayment schedule should be tested against that explanation, not simply against annual revenue.

Source: BDC: Working capital loans

Worked example: funding today creates a later payment

A fictional business starts a four-week period with $20,000. It expects $50,000 of customer collections and $85,000 of supplier, payroll and other payments. The projected closing balance is negative $15,000. If management wants a $10,000 minimum balance, the temporary funding need is $25,000. This calculation assumes the cash arrives and leaves on the forecast dates; the lowest daily balance may be worse.

Suppose a proposed loan deposits $25,000 but requires $3,000 of payments during those four weeks. The revised closing balance is $7,000, which is still $3,000 below the chosen buffer. Funding the original gap without including the new repayments produced an incomplete plan. Compare a longer schedule, a smaller purchase or faster collections, and model each alternative using the actual proposed fees and dates.

Distinguish a recurring gap from an investment

A one-time project may create several months of operating need before new sales arrive. A revolving facility may suit repeated drawing and repayment, while a term structure may support a defined longer investment. The names used in lender marketing are not identical across providers. BDC’s working-capital product, for example, is a term-loan structure; it should not be assumed to operate like a reusable line.

Update the forecast after funding rather than filing it away. Compare expected collections with actual collections and identify the reason for any difference. If every month requires a fresh advance to cover the previous one, revisit pricing, expenses and the operating model before treating more borrowing as the solution.

Give the forecast an owner and a review date. Each week, compare the previous estimate with actual cash, then update the next period using what changed. A recurring difference may reveal slow collections, a supplier term change or a spending assumption that was too optimistic. Write the reason beside the adjustment. That running explanation helps a lender and the business distinguish a temporary timing issue from an operating problem that financing alone will not resolve.

• What exactly creates the gap, and when does it end?
• How much cash is available after fees and existing obligations?
• What happens if collections arrive two weeks later?
• Can the business repay without another unapproved facility?

Your next-step checklist

• Weekly cash-flow forecast
• Seasonality and collection timing
• Existing debt payments
• Expected repayment source