A Beginner’s Guide to Working Capital

Using working capital to help your business grow is an important part of keeping your company alive and thriving, regardless of its size or niche. It’s something that should be on the radar of any small business owner. But you may find yourself feeling confused about how it works or why it’s necessary in the first place. Luckily, you are not alone in this.

What is Working Capital Financing?

Current assets are cash and things that you can convert into cash within a year (such as accounts receivable, inventory, and prepaid expenses). These are accounts payable, expats taxes owed in less than a year, interest payable on debt within a year, and short-term loan repayments due within one year.

Current Assets Include:

• Cash

• Accounts receivable

• Inventory

• Prepaid expenses

• Marketable securities

Current Liabilities Include:

• Accounts payable

• Short-term loans

• Taxes due within one year

• Interest payable on debt

• Accrued expenses

Working capital financing involves borrowing funds or using financing tools to cover these day-to-day operational needs. This could include paying suppliers, purchasing inventory, covering payroll, or managing seasonal revenue fluctuations.

Working Capital Financing for Small Businesses

Starting a small business is exciting as well as overwhelming, and one of the most crucial parts of that process is financing your operation. Small businesses require a lot of capital, and since you cannot take on personal loans in your name, you must think about financing from day one. Let’s get an understanding of startup capital.

A woman-owned business is one where at least 51% is owned, operated, and controlled by one or more women who control management and daily operations. If a woman owns less than 51% of an eligible business, she may still receive woman owned business grants if she can demonstrate her active role in management. This will require sufficient documentation showing that she maintains day-to-day involvement in strategic decision-making. However, according to Lantern by SoFi, “Small business grants for women are frequently reserved for established businesses.”

Startup Capital vs. Working Capital

• Startup capital helps you launch your business—registering the company, purchasing equipment, initial stock, etc.

• Working capital, on the other hand, keeps your business running daily after launch.

You can’t operate efficiently without maintaining a healthy balance between both.

Women-Owned Businesses and Funding Opportunities

A business qualifies as women-owned if:

• At least 51% is owned and controlled by one or more women.

• Women manage daily operations and long-term decision-making.

In cases where ownership is less than 51%, funding may still be available if the woman owner proves significant involvement in management and strategy through documentation.

However, according to Lantern by SoFi, small business grants for women are generally reserved for well-established businesses, not startups. This often means new women entrepreneurs must rely on loans, private funding, or alternative financing until they qualify for grants.

The Basics of Working Capital

If you’re in business, you must have employees and customers. If so, then you need money (working capital) to conduct your day-to-day operations. But how do you know how much working capital is enough?

If your business has customers, employees, vendors, and obligations, you need working capital. It allows you to:

• Pay suppliers on time

• Cover payroll

• Purchase inventory

• Handle unexpected expenses

• Invest in marketing

• Support growth during seasonal dips

Your working capital requirement depends on:

• Your industry

• Business model

• Payment cycles

• Inventory turnover

• Operating structure

For example, a retail business with large inventory needs more working capital than a consulting firm that operates digitally with fewer overheads.

Types of Funding

There are plenty of resources available to you to help you better understand what working capital financing is and how it benefits your small business. First, you should know that it can be attributed to two factors: 1) It costs a lot of money and time to apply for government grants. 2) Government grants are only available for certain types of businesses.

Thankfully, there are other types of funding available for businesses in all stages of development, including startup funding, loans, angel investments, and venture capital.

Types of Working Capital Funding

Government grants are often limited, competitive, and available only to specific industries or groups. They also take time and effort to apply for. Fortunately, businesses have multiple other options:

1. Working Capital Loans

These are short-term loans used for managing operations. They are easy to obtain and offer flexibility.

2. Business Lines of Credit

A line of credit works like a credit card. You use what you need, repay it, and borrow again.

3. Invoice Factoring

You sell your unpaid invoices to a factoring company for immediate cash—useful if you deal with long payment cycles.

4. Merchant Cash Advances

Ideal for businesses with strong daily sales. You receive a lump sum and repay through a percentage of daily revenue.

5. Equipment Financing

If you require machines or hardware, financing them can free up working capital.

6. Angel Investors

Individuals who invest money in promising startups.

7. Venture Capital

Best for scalable businesses in technology, manufacturing, or innovation.

8. Trade Credit

Suppliers allow you to purchase now and pay later, improving cash flow instantly.

Each funding source comes with specific interest rates, repayment terms, and eligibility criteria. Professional financial consultants can help you choose the best solution based on your business model.

How is Working Capital Calculated?

To calculate working capital, subtract a company’s current liabilities from its current assets. The four primary variables used in working capital calculations are accounts receivable, inventory, accounts payable, and short-term debt. In essence, they all boil down to how much money you owe and how much money institutions owe to you.

A working capital loan is a flexible and easy-to-use alternative financing tool. Whether you’re looking for term loans, lines of credit, or invoice factoring, you should hire a professional to help you find solutions that will help your business grow.

Working capital = Current Assets – Current Liabilities

For example:

• Current Assets = ₹10,00,000

• Current Liabilities = ₹6,50,000

Working Capital = ₹3,50,000

A positive number means your business can cover its short-term obligations. A negative number indicates a cash flow issue that needs immediate attention.

Primary Variables Used in Working Capital Calculations:

• Accounts Receivable: Money owed to you

• Inventory: Stock you can sell

• Accounts Payable: Money you owe

• Short-term Debt: Loans due within a year

Healthy working capital ensures your business runs without financial stress.

Strong Working Capital Allows You To:

• Maintain healthy supplier relationships
  Take advantage of bulk purchase discounts
  Avoid late fees
  Expand operations smoothly
  Manage emergencies
  Improve creditworthiness
  Invest in new opportunities quickly

In short, working capital is the fuel that keeps your business engine running.

Conclusion

Working capital is the backbone of any business. Whether you’re managing payroll, purchasing inventory, or planning expansion, working capital financing ensures you have the liquidity needed to operate smoothly. With multiple funding options available—loans, lines of credit, factoring, and investments—business owners have more opportunities than ever to maintain financial stability and drive growth.

Whether you’re a startup founder, a woman-owned business owner, or an experienced entrepreneur, understanding working capital can empower you to make smarter financial decisions and ensure long-term success.