What Is The Working Capital Cycle, And When Is It Required?

working capital cycle

One of the most common and popular types of small business loans, working capital loans are used by business owners and entrepreneurs to fund a variety of needs from new equipment to inventory management and much more.

Perhaps the biggest advantage of working capital loans is the method by which repayment is taken. Instead of a flat monthly rate like a lot of loans, working capital operates under (and gets its name from) a system of repayment where a small amount is taken out of the daily sales of the business until the loan is repaid, allowing for far more flexibility in payment time and amount, generally resulting in healthier overall finances for the business.

This method of repayment helps businesses to better manage one of the more common aspects of business financial management, known as the working capital cycle. The working capital cycle (or WCC) refers to the amount of time it takes to turn a business’ net current assets or current liabilities back into cash.

Think of it this way: if a company pays its suppliers in 30-day cycles but it takes 60 days to receive the items they ordered, this business has a 30 day working capital cycle due to the difference in time between placing and receiving the order. Even while a business is profitable, managing the WCC is crucial to ensuring there’s always easily accessible capital and funding to manage ongoing business operations.

Small business funding of any type can play into this cycle. Getting a business loan is a perfect way to increase your available working capital and potentially get through a cash shortage – if your cycles are too long or you have too much capital tied up in deliverables and potential business opportunities, working capital loans can be a great way to handle short-term financing needs during longer stretches of the cycle.

If your business deals in a lot of receivables or deliverables, or if you have a lot of cash that needs to be converted and unavailable, it’s always in your best interest to monitor the working capital cycle to ensure the health of your business.