Working capital

A company’s working capital is balanced against its current assets and current liabilities.

Positive working capital means that the company has the ability to pay off its short-term liabilities. These liabilities will be payments to suppliers for raw materials or services. Wages and salaries to employees, utility payments as well as other general costs. Dependant on the form of business loan undertaken, there could be a need for regular repayments, this will alos be drawn from working capital ( unless a suitable provision has been made elsewhere in the balance sheets). 

Negative working capital occurs where a company is unable to meet its short-term liabilities with its available assets (cash, accounts receivable and inventory).
Companies with negative working capital may lack the funds needed for growth as they are cash poor. Insufficient liquidity means they are unable to purchase sufficient stock to maintain production, or benefit from discounts on bulk purchasing. This situation will have a detrimental effect on the company’s performance, reducing profitability and operational effectiveness by disrupting production.

If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. This is not a favourable position to be in. Defaulting on business loans of any kind has a negative effect on future borrowings. A lender may well offer business loans to a company that has a less than perfect record of repayment. However there will be a premium on the repayment terms to reflect the greater level of risk attached to the business loan being offered.

Working capital gives investors an indicator of the company’s status whether it is a good risk bad risk. It is not solely the working capital available that demonstrates a company’s performance. Some investors, with a long term approach to investment will consider much more than simply liquidity. They will consider the potential of the company’s products to develop and expand into new markets.

Many businesses have gone under, not because they were unprofitable, but because they suffered from shortages of working capital. This can be a short term view, sometimes not viewing the entire picture, yet if the business loan is due; it is a case of the business owner convincing the lender of the benefits to them of continuing the business loan rather than force the business to close or reduce trading to an unsustainable level.