Working Capital Lquity

The working capital equation usually refers to the formula used to calculate a business's working capital

. To determine working capital, businesses subtract current liabilities from current assets. Current liabilities, also known as short-term debt, can be loan payments, inventory purchases, or rent. Current assets, which can be easily converted into cash, usually include accounts receivables and cash on hand. Positive working capital means a business has more assets than liabilities and is able to fund daily expenses. Negative working capital means a business has more liabilities than assets and cannot pay off its short-term debt. Effective management of working capital results in steady success for a business.

One reason a business may fall on the negative side of the working capital equation is because its inventory is not being sold. The longer that inventory is not sold, the longer it ties up vital working capital. Businesses should try not to store more inventory than they absolutely need. To get rid of excess merchandise, businesses can hold sales or offer special discounts to frequent customers.

Some businesses also free up working capital by giving a small discount to customer accounts that are paid off within a short amount of time. They can also charge late fees to customer accounts that are not paid off within a given time period. These strategies give clients an extra incentive to pay the business as soon as possible, which leads to increased working capital.

Business owners looking for working capital equity are usually referring to working capital equity loans, funding for working capital that is secured by business or personal assets. Businesses need working capital to finance daily operations, mainly short-term debt. Short-term debt, also called current liabilities, include loans, rent, utilities, and inventory purchases. When a business's current liabilities outweigh its current assets, the business may have to consider alternative funding methods.

A working capital equity loan provider usually requires the same information as other lenders: personal and business financial statements, a written business plan, and credit histories from each owner of the company. Unlike most traditional loans, however, equity loans require business or personal assets to secure the funding. Since this loan is based on equity, acceptable forms of collateral may be property, stocks, equipment, and the owner's investment in the company. Most business owners avoid using personal assets, such as a home, as collateral because it puts them at too high of a risk if they fail to repay the loan.

Once a business meets the requirements and has sufficient collateral, it must apply for the working capital equity loan. Applications may be available at the lender's establishment or on the Internet. Approval can take one business day or more. Like with any loan, the interest rates, loan amounts, and repayment options vary by lender and by the applicant's financial history.

Working Capital Lquity

By: benjamein.moore

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