How to Find Working Capital for Your Small Business

Updated on March 5, 2020
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How to Find and Manage Working Capital

Finding your business’s working capital is as simple as subtracting your current liabilities (what your business owes) from your current assets (what your business owns).

Learning how to find working capital for your small business is as simple as learning a straightforward formula:

Working capital = Current assets – Current liabilities

If there’s one financial calculation that you should make for your small business, it’s finding your exact working capital. Knowing this number will give you insight into your business’s short-term liquidity. The greater your working capital, the more financial freedom you have to grow. Conversely, if your working capital dips too low or gets in the negative, you should take action to stabilize your number right away.

Sometimes, borrowing smartly can support your overall working capital strategy and teach you how to manage your reserves well in the long run. In this guide, we’ll take the guesswork out of calculating your working capital, knowing when you need more, and finding working capital loans.

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Finding Working Capital: The Details

Working capital represents the amount of cash a company has on hand to cover operational expenses. Though there are a few different ways to calculate working capital, the most basic is to subtract short-term liabilities from short-term assets. Stated another way, working capital is the difference between what the firm owns and owes in the short-term.

Working Capital = Current Assets – Current Liabilities

This formula will give you your dollar amount of working capital. But you can take this a step further and calculate your working capital ratio (also called the current ratio). The formula for working capital ratio is:

Working Capital Ratio = Current Assets / Current Liabilities

Although these are two different ways of calculating working capital, both formulas are designed to show your company’s short-term liquidity.

Why Businesses Need Working Capital

Without sufficient working capital, a business won’t have the cash to fund operational expenses and short-term growth.

Working capital covers the following types of costs:

  • Payroll
  • Rent
  • Debt payments (principal and interest)
  • Supplies
  • Taxes
  • Other overhead costs.

Having enough working capital to cover these costs means that you’re not only keeping your business’s doors open, but you’re also investing in your company’s growth.

A low amount of working capital means that the business’s current assets don’t exceed the business’s current liabilities, so you’ll have trouble paying short-term creditors back. If your lack of working capital gets too low, you could end up in bankruptcy or have to close the business.

How to Calculate Working Capital on Your Balance Sheet

Working capital and working capital ratio are both balance sheet calculations. To begin, choose a time period for calculating working capital. In many cases, this is one year. But you can also calculate working capital on a quarterly or monthly basis.

First, find the section that lists the company’s assets. The asset section of your business’s balance sheet will typically list assets in the order of their liquidity, so your current assets should be near the top of that list. Add all the individual current asset account balances and obtain a total.

Next, find the section that lists the company’s liabilities. You’ll want to find the current liabilities. Because a balance sheet typically lists liabilities by order of due date, the current liabilities should be somewhere at the top of the list. Add up the current liability account balances and obtain a total.

Take the two totals, and subtract liabilities from assets. The result is your pool of working capital for the given time period in which you were looking.

    Example of Calculating Working Capital

    Balance Sheet

    Current Assets:

    • Cash = $100,000
    • Inventory = $200,000
    • Accounts Receivable = $400,000

    Total Current Assets = $700,000

    Current Liabilities:

    • Accounts Payable = $200,000
    • Short-Term Loans = $50,000
    • Long-Term Loans due for the current time period = $30,000
    • Other Accrued Expenses = $300,000

    Total Current Liabilities = $580,000

    Working Capital = $700,000 – $580,000 = $120,000
    Working Capital Ratio = $700,000 / $580,000 = 1.2

Do You Have Enough Working Capital?

Once you calculate your working capital and working capital ratio, you need to know how to interpret those numbers. If you get a number below 1, that means you have negative working capital. A ratio above 1, on the other hand, means that you have positive working capital.

Having enough working capital is a matter of hitting the sweet spot: Anywhere between a 1.2 and 2.0 working capital ratio is a good sign. Less than that, and you don’t have enough money to pay operational expenses. More than that, and you’re not properly investing wisely in your business’s growth.

Insufficient working capital points to red flags in the company’s operations. For instance, you might find that your lack of working capital is a result of the fact that your sales are declining. With fewer and fewer sales, you’ll have less to collect in accounts receivables, and a smaller pile of working capital left over for your business.

When calculating your working capital, pay close attention to the types of assets and liabilities your business has. If too much money is tied up in inventory or invoices, for instance, that can hurt your working capital position.

Fortifying Your Working Capital With a Loan

After calculating your business’s working capital, you might find one of three things.

The best case scenario is a working capital ratio between 1.2 and 2.0. This is a good sign that your business is operating smoothly, and that you always have cash on hand (and then some) to cover your short-term obligations.

You might also find that your current liabilities equal your current assets exactly—meaning you have just enough working capital on hand to satisfy your obligations. This doesn’t give your company much breathing room—and financial breathing room can be crucial to weather the ups and downs of running a business.

And finally, you might crunch the numbers and find that you’re actually in the negative. You don’t have enough working capital on hand to meet your short-term obligations.

Being in one of the last two scenarios will prompt the question in any business owner’s mind: “How do I find more working capital?” Working capital loans can be a good solution.

Working Capital Loans to Improve Working Capital

When you need to find working capital for your business, a good way to give yourself extra padding to meet your obligations is a working capital loan.

Working capital loans are loans used specifically to finance the everyday operations of a business.

The cash that you don’t have to cover your short-term obligations can be compensated with a working capital loan. Since these loans are designed to pay for short-term expenses, the loans are typically structured as short-term loans.

Generally speaking, these loans offer small amounts of capital (up to $250,000) and repayment periods of up to 18 months. That said, other types of business loans, such as SBA loans and invoice financing, can also serve as a source of working capital.

These loans can be exactly what a business needs to get a handle on covering operational expenses and making smart investments in the business in the near term.

Find the Best Working Capital Loan for Your Business

Dozens of lenders offer working capital loans. Banks and online lenders provide working capital loans, and the best option for you depends on your credit score, your revenues, and the type of business you have.

Here are some of the best working capital lenders to try.

1. Kabbage

Kabbage is a line of credit lender that’s a good option for borrowers who need working capital—quickly. The funding process takes as few as a few hours.

If you have a weak credit score, Kabbage could be a good option for you: They don’t set a minimum credit score to qualify. You should, however, have been in business for at least one year with annual revenues of at least $50,000.

Kabbage offers lines of credit up to $250,000 for terms as long as 12 months. You can use the funds for many different business purposes, making them a good option for working capital needs.

Read more Kabbage reviews

2. OnDeck

OnDeck offers short-term loans for a variety of business purposes. They offer short-term loans of up to $500,000, for terms as long as three years.

Similar to Kabbage, OnDeck is a good option for newer businesses and business owners with struggling credit scores, but those with strong cash flow. You’ll need to have a minimum personal FICO score of 500, $100,000 in annual revenue, and at least 12 months in business.

Read more OnDeck reviews

3. Funding Circle

Funding Circle is a great lender to work with if you’re a slightly more qualified business owner. They offer medium-term loans of up to $500,000, with terms as long as five years.

While Funding Circle doesn’t have an annual revenue requirement, they will only work with borrowers with a minimum of a 620 credit score and two years in business.

With large amounts and long terms, Funding Circle is a great working capital option for businesses with larger operational expenses to cover.

Read more Funding Circle reviews

4. BlueVine

BlueVine is an invoice financing company that can help B2B businesses find working capital when they have cash tied up in unpaid invoices. In exchange for your unpaid invoices and a fee, BlueVine will extend you a revolving business line of credit.

BlueVine can offer up to $5 million, depending on the invoices in question. B2B businesses with outstanding invoices are eligible for BlueVine. You must have a credit score of at least 530, $100,000 in annual revenues, and have been in business for at least three months.

Read more BlueVine reviews

5. FundBox

Another invoice financing company for working capital solutions is Fundbox.

Like BlueVine, Fundbox is a great option for businesses with unpaid invoices. Fundbox is slightly easier to qualify for, but and they work with smaller invoices. The maximum amount a borrower can be approved for is $100,000.

Read more Fundbox reviews

6. SmartBiz

The lenders we’ve covered so far can get working capital into your hands quickly, and they’re easier to qualify for. However, they also tend to be more expensive. Business owners with the strongest qualifications can try for an SBA loan to find working capital.

SmartBiz is an online SBA loan platform that specializes in SBA 7(a) loans. of up to $350,000. They typically work with borrowers who have over a 650 credit score, have been in business for at least two years, and have annual revenues of $100,000.

You basically can’t beat SBA loan interest rates. Plus, you can use SBA 7(a) loans for virtually any operational expense, making this a very versatile, low-cost loan.

Read more SmartBiz reviews.

How to Manage Your Working Capital

After you calculate your working capital ratio, and find working capital for your business, you might think the work is over. But after you find working capital loans, you should use that loan responsibly and take measures to better manage your working capital in the future. This will prevent you from having to take on additional debt in the future.

What are the best practices for managing working capital? Here are some basic working capital management tips.

Keep a Careful Eye on Your Expenses

Even the smallest, most inconsequential expenses add up. And every little bit takes away from your working capital. To keep an eye on your working capital levels, be sure to carefully control your expenses.

Setting clearly communicated rules for your employees is crucial to keeping expenses like travel and entertainment to a minimum. Plus, as the business owner, you should be sure to be watchful of company-wide expenses and cut back on costs wherever you can.

Improve Your Receivables Collection

Many companies have working capital that’s trapped in their customers’ unpaid invoices.
If this is a recurring issue for your business, consider adjusting your collection process to better secure what you’re owed on time.

When auditing your invoicing system, think through how you can send out your invoices faster, employ technology to shorten the payment cycle, or offer early payment discounts to customers to encourage quick payment.

Pay Your Vendors On Time, Too

While you might not think this directly affects working capital, paying your vendors on time will go a long way in improving your cash flow.

Businesses that have fewer days of accounts payable outstanding tend to have better relationships with their vendors. And having a better relationship with your vendor can put you in a better position for negotiating. When negotiating, you can secure better deals, payment terms, and even discounts.

If you keep your suppliers happy, you might save some money in expenses in the long-term—helping out your working capital reserves.

Reinvest in Your Business

This last working capital management item is the most important, especially for growing businesses.

Reinvest in your business.

Redirecting money back into your company is a good thing. That’s the best way to grow in the short-term. Just make sure you’ve left some room for regular expenditures when deciding how much working capital to have on hand at any given time.

Reinvesting in your business can include saving up for new equipment, investing in marketing or hosting an event where everyone can see your products. Use a working capital loan to not only cover your regular expenses, but also to invest in growth activities that will pay off for your business in the long run.

How to Find Working Capital: The Bottom Line

Working capital is critical to any business’s success. Regularly monitor this number by subtracting liabilities from assets, and also keep an eye on your working capital ratio. If the number dips too low, there are actionable steps you can take to get things back in order. And in some situations, a working capital loan can be part of your growth strategy. Just make sure you borrow only what you need, when you need, and pay the debt back on time.


Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email:
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