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Working capital
Also called net working capital, operating capital, working capital loan.
Current assets minus current liabilities — the cash and near-cash a business has to run on after short-term obligations — and, loosely, the category of financing used to fill that gap.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
As an accounting measure it is what is left when everything due within a year is subtracted from everything convertible to cash within a year: cash, receivables and inventory against payables, accrued expenses, the current portion of long-term debt, and any short-term facility. Positive working capital means the business can meet the next twelve months of obligations from current resources. Negative means it cannot, and depends on new revenue or new financing arriving in time.
The gap it measures is usually a timing problem rather than a profitability problem. A business that pays suppliers in 30 days and collects from customers in 60 has a structural 30-day hole that grows as it grows — which is why profitable, expanding businesses run out of cash.
As a product category, "working capital financing" is used for anything funding operations rather than an asset: lines of credit, short-term loans, advances, factoring, and revenue-based financing. The label describes the use, not the structure, and structures inside it differ enormously in cost and in obligation.
Where this one catches people
"Working capital loan" is a use-case description that brokers apply to whatever product they are selling. It carries no information about whether the thing on offer is an amortising loan, a pre-computed short-term loan, a revolving line or a purchase of receivables — and those differ by multiples in cost and completely in what happens when revenue falls. The label is not a product. Ask what the instrument is.
Worked through
Illustrative only. Current assets: $180,000 cash, $240,000 receivables, $130,000 inventory — $550,000. Current liabilities: $210,000 payables, $60,000 accruals, $90,000 current portion of debt — $360,000. Working capital is $190,000. Add a new advance whose next twelve months of remittances total $150,000 and the same business has $40,000 of working capital.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
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Working capital — common questions
What does working capital mean?
Current assets minus current liabilities — the cash and near-cash a business has to run on after short-term obligations — and, loosely, the category of financing used to fill that gap.
Where does working capital catch people out?
"Working capital loan" is a use-case description that brokers apply to whatever product they are selling. It carries no information about whether the thing on offer is an amortising loan, a pre-computed short-term loan, a revolving line or a purchase of receivables — and those differ by multiples in cost and completely in what happens when revenue falls. The label is not a product. Ask what the instrument is.
Is working capital the same as an interest rate?
Working capital is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does working capital apply to?
Merchant Cash Advance, Working Capital, Term Loan, Business Line of Credit, Invoice Financing.
Is there a worked example of working capital?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside working capital?
Cash flow, Current ratio, Invoice factoring, Line of credit, Trade credit.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.