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Working Capital

Working capital can be defined as current assets minus current liabilities. A lack of liquidity is when a company’s assets are not easily converted into profits. So if a company does not have a sufficient enough positive working capital to allow for the development of future profits, future expenses may overtake those profits and the company may run into financial difficulty. Sufficient positive working capital can be financed by loans, grants or by private investment. An increase in liquidity is the best method of ensuring positive working capital. Sometimes external sources are required to increase the available working capital loans. One source is a line of credit. You can Get Started here.

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Working Capital Loan

A working capital loan can help compensate for poor liquidity. To set up  a working capital fund or line of credit, the borrower must meet with a representative of the bank and discuss the company’s needs. If a line of credit is your preferred loan type, the line of credit may take the form of a company overdraft, credit card, term or demand loan depending on the bank and the application. The borrower must have a good credit rating and the company must be able to show that more than enough revenues will be made in the short term to pay back any borrowed credit. Once the line of credit has been set up, there is no need to ask for permission to make use of the credit. The amount the company is allowed to withdraw is predefined and the company only pays interest when the line of credit is in use.

Down Side of a Line of Credit for Working Capital

If a company takes out more credit than the line or credit allows, an “over limit fee” will be charged. This could have severe consequences; the company would be placed under further financial pressure even before using its line of credit. This type of loan is unsecured. The borrower’s history and the company’s estimated short term profits will therefore have a large bearing on the line of credit’s limit. If the borrower has proven him or herself to be someone that never goes beyond the credit limit and always pays any applied interest on time, the bank may allow an increase in credit limit. If a company lacks liquidity, applying for a line of credit is an ideal way to quickly have access to some extra working capital cash.

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