How much working capital does my business need?
Enough to carry your cash conversion cycle: the days customers take to pay, plus the days stock sits before it sells, minus the days suppliers give you, multiplied by what the business spends per day. A business spending $5,000 a day on a 40-day cycle has about $200,000 tied up at any time, before a cushion for slow months.
Start an applicationWork the three numbers from your own books. Days to collect is receivables divided by annual sales, times 365. Days of stock is inventory divided by annual cost of goods sold, times 365. Days to pay suppliers is payables divided by annual cost of goods sold, times 365. Add the first two and subtract the third: the result is the cycle in days, the time each dollar spent is out of the business before it comes back as cash. A service business with no stock and 45-day client terms has a cycle of about 45 days. A retailer paid at the till, holding 90 days of stock on 30-day supplier terms, has a cycle of about 60.
The balance-sheet check is the current ratio: current assets divided by current liabilities. A ratio between about 1.2 and 2 is generally read as comfortable. Below 1, short-term bills exceed the resources available to pay them, and a bank lending against working capital will often set a minimum ratio as a condition of the facility. The cycle tells you how much cash the business needs; the ratio tells a lender whether the business already has it.
Growth and seasons are where the estimate fails. Every new dollar of monthly sales has to be funded for the full length of the cycle before it pays back, so a fast-growing business needs more working capital in its best quarter, not its worst. A seasonal business should size to its lowest month in the bank statements rather than the yearly average, because the average hides exactly the gap that has to be funded.
Then match the money to the cause of the gap. Slow-paying business customers point to invoice factoring, which turns receivable days into cash. Stock bought ahead of sales points to inventory financing. A gap that opens and closes through the year points to a revolving line of credit. A gap that never closes is permanent working capital, and it belongs on a term loan or in the owners' equity rather than on short-term money. Before financing any of it, check the levers that cost nothing: invoice on delivery instead of at month-end, and ask suppliers for longer terms.
What each product is for
| Merchant Cash Advance (MCA) | Fast working capital, cash-flow-driven approval |
|---|---|
| Business Line of Credit | Fluctuating cash needs, payroll smoothing |
| Invoice Factoring | B2B businesses with slow-paying clients |
| Equipment Financing | Trucks, machinery, kitchen, construction, tech |
| Bridge Loan | Short-term gap until a known future event |
| Term Loan | Growth, expansion, refinancing |
| Inventory Financing | Buying stock before it sells |
| Acquisition Financing | Buying a business or partner buyout |