Working capital financing for a growing business

A growing business can be profitable and still run short of cash. The reason is timing. Payroll, inventory, and suppliers get paid before customers do. Working capital financing exists to cover that gap. Used well, it lets an owner take on larger orders without straining the business. Used poorly, it hides a deeper problem until a lender asks about it.

Understand your cash conversion cycle first

Before choosing a product, measure the gap you are trying to fund. Three numbers matter:

• Days inventory: how long goods or materials sit before they are sold.
• Days receivable: how long customers take to pay after you invoice.
• Days payable: how long you take to pay your own suppliers.

Add the first two and subtract the third. The result is roughly how many days of operating costs the business must carry on its own. Multiply that by your average daily costs and you have a working estimate of how much capital the cycle consumes.

This exercise often changes the conversation. Some owners find the need is smaller than expected once collections tighten. Others find the need grows with every new contract, which points to a structural solution rather than a short term patch.

The main working capital tools

Revolving line of credit

A revolving line lets the business draw, repay, and draw again up to a limit. Interest is usually charged only on the balance outstanding. Banks typically review the line each year and may require the balance to be paid down to zero for a period. A line fits a business with seasonal swings or uneven collections.

Asset based lending

An asset based loan ties availability to a borrowing base. That base is usually a percentage of eligible receivables and inventory. As the business grows, availability can grow with it. The tradeoff is reporting. Expect regular borrowing base certificates, receivable agings, and periodic field exams.

Invoice factoring

Factoring is the sale of receivables to a third party at a discount. It can fund quickly and leans on the credit quality of your customers. It is often more expensive than bank credit, and customers may learn that a factor is involved. It suits younger companies or those that do not yet qualify for a bank line.

Term loans

A term loan is a lump sum repaid over a fixed schedule. It works best when the working capital need is permanent. A business that has grown into a larger base of receivables may be better served by term debt than by a line that never gets paid down.

Match the tool to the need

The most common mistake is funding a permanent need with temporary money. If a line of credit stays fully drawn all year, it is no longer working capital. It is long term capital priced and structured as a short term facility. Lenders notice this at renewal.

A simple way to think about it:

• Seasonal or cyclical gaps fit a revolving line.
• Growth that scales with sales fits asset based lending.
• A permanent step up in operating scale fits term debt or equity.

What lenders review

Working capital lenders focus on the quality of the assets behind the loan and on the owner's reporting discipline. Be prepared to provide:

• Accounts receivable and accounts payable agings
• Inventory reports by category and age
• Interim and year end financial statements
• Customer concentration detail
• Business and personal tax returns

Clean, timely reporting does more than help approval. It often determines how much of your receivables and inventory a lender treats as eligible.

Closing thoughts

Working capital is a planning question before it is a borrowing question. Know your cycle, separate the seasonal need from the permanent one, and choose a structure that fits each. Our capital readiness tool is a useful way to see how a lender may view your business today. If you would like to talk through the right structure for your company, contact us.

Thomas Capital Holdings is not a registered investment adviser and does not provide investment advice or recommend securities. Consult your own advisors about your situation.