Working capital is the difference between a business's current assets (cash, receivables, inventory) and current liabilities (payables, short-term debt) — the buffer of liquid resources that funds day-to-day operations.
Working capital measures the cash a business has available to fund its operating cycle — paying suppliers, covering payroll, financing inventory, and bridging receivables until customer payments arrive. The standard formula: Current Assets minus Current Liabilities. Positive working capital means the business can cover short-term obligations without raising new financing. Negative working capital (current liabilities exceed current assets) means the business needs external cash to bridge — either through a working capital loan, a line of credit, a merchant cash advance, or factoring receivables. Lenders evaluate working capital ratio (current assets / current liabilities) as part of underwriting most non-collateral-backed business financing. Ratios between 1.5 and 2.0 are typically considered healthy; below 1.0 signals immediate cash-flow risk; above 3.0 may suggest underused capital that could fund growth.
Working capital is a balance-sheet snapshot — what you have RIGHT NOW. Cash flow is the movement of money over a PERIOD (typically monthly or quarterly). A business can have strong working capital one day and run out of cash a month later if operating cash flow turns negative. Lenders look at both.
Three paths, in order of preference: (1) accelerate collections — invoice faster, tighten payment terms, offer early-pay discounts; (2) extend payables — negotiate longer terms with suppliers; (3) raise short-term financing — working capital loan, line of credit, factoring, or MCA. Most operating businesses cycle through all three depending on the season.
Short-term financing specifically designed to bridge operating-cycle gaps. Typical terms: 3-18 months, $25K-$500K, secured by business receivables or general business assets. Used to cover payroll, inventory, equipment, or vendor payments — not long-term investments. APR varies from prime+spread for bank LOCs to 30-80% APR-equivalent for non-bank short-term loans.
Merchant working capital refers to short-term funding structured around a merchant's daily or weekly credit-card and debit-card sales — typically delivered through a Merchant Cash Advance (MCA). Instead of a fixed monthly payment, the merchant repays by remitting a fixed percentage (the holdback rate, typically 8–20%) of each day's card sales until the advance plus fees is repaid. It's called 'merchant' working capital because the repayment mechanism depends on the merchant's card-processing volume, not fixed cash flow.