Is Your Working Capital Working for You?

By Scott McCaughey, Vice President, Commercial Banking
Washington Trust

The success of your business relies on capital to meet your short-term needs. So how is your working capital working for you?

As a refresher, your business’s net working capital is equal to your current assets minus your current liabilities. Working capital not only indicates your business’s short-term financial health, but also refers to the capital that you have on hand to spend on daily expenses.

When You Need More Capital

There are many reasons your business might need additional working capital:

• Growth. To cover short-term increased expenses (e.g., payroll, inventory) before your accounts receivable can catch up.
• Delayed payments. To fund obligations while waiting for payments from customers.
• Seasonal fluctuations. To prepare for a busy season or to keep the business operating when there is less money coming in during cash flow fluctuations.
• Bulk purchases. To take advantage of bulk purchasing, particularly with today’s inflation and supply chain issues.
• Temporary projects. To pay temporary employees or cover short-term project-related expenses.
• Emergencies. To cover those sudden and unwelcome expenses that every business faces from time to time.

As a business owner, it’s important that you take steps to ensure you have adequate working capital to maintain a stable financial position and have a safety net for a cash crunch or unexpected expenses. Businesses caught without sufficient working capital can face missed opportunities, decreased productivity, and in worst cases, bankruptcy.

Is a Line of Credit Right for You?

A business line of credit can provide you with a flexible and convenient resource for financing accounts receivable and inventory, or to take advantage of business opportunities as they arise. Lines of credit can fill unpredictable gaps in your business’s cash flow, and they are cost-effective because you draw on funds only when you need them and only pay interest on the amount that you borrow.

You can draw from your line of credit whenever you want, and you’ll repay the funds over a set amount of time with interest. In a revolving line of credit, once you’ve repaid what you owe, your credit line resets to the original amount.

The key is to have the line of credit available before you need it. You may never need to use it, but make sure it’s there if you do.

Avoiding Line of Credit Pitfalls

While a line of credit can provide you with quick access to cash, just like a credit card they can also be a trap if not used responsibly. It’s important to ensure that you have a plan in place for repaying the borrowed funds and that you don't become reliant on them for your day-to-day operations.

If you’re looking at funding larger purchases or long-term assets, like vehicles or equipment, a fixed-rate commercial loan is advised over lines of credit, which typically have variable rates and are designed to fund short-term assets and be paid off in the short term, too.

When deciding how to increase your working capital, it’s important to speak with a trusted lending expert who knows your business and understands your financial health.

Washington Trust is Here to Help

At Washington Trust, our experienced lending experts take the time to get to know you and your business, so we can tailor a financing solution to meet your specific needs. If a line of credit is right for you, we offer a range of credit line options, allowing you to choose the terms that suit your business needs best.

If your needs call for a different financing option, we can help you choose from our comprehensive suite of loan products, from term, construction, and SBA loans to commercial real estate mortgages and leasing arrangements. Our team is here for you.