The money a business has tied up in day-to-day operations, measured as current assets minus current liabilities; a working capital loan funds that gap.
Working capital is the short-term money a business runs on. Take current assets, such as cash, receivables and inventory, and subtract current liabilities, such as payables and debt due within a year. A business can be profitable and still run short, because it pays suppliers and staff before its customers pay it.
A working capital loan fills that gap. The Federal Reserve’s examination manual says these loans give a business short-term financing for inventory, receivables, supplies or other operating needs during the business cycle, and that they are repaid from the cash produced when the financed assets are converted. The OCC’s commercial loans handbook says they finance seasonal needs and are repaid at the end of the cycle.
Lenders therefore check that the money goes where you said. The manual says the lender’s main aim is to confirm advances are used for inventory or payables and not to buy fixed assets or pay other debts. A need that never goes away is a different thing. Lenders call it permanent working capital and usually want it on a term loan that amortizes.
How it shows up in the data here
Working capital loans to businesses are part of the commercial and industrial balance a lender reports as held. See business lenders by state and the business loan books ranking. The call report does not say what a loan was for, so working capital cannot be split out. SBA 7(a) loans, many of which include working capital, are in the SBA file by lender at SBA 7(a) lenders.
Go further
- Business lenders by state: Lenders holding business loan balances.
- SBA 7(a) lenders by state: Lenders that made SBA 7(a) loans.
- Business line of credit package checklist: A line of credit pays for the gap between spending money and collecting it. The lender wants to see that the gap is real, that it closes, and what it can take as collateral while it is open.
- How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
- Global cash flow, explained step by step: A property can cover its loan while the people behind it cannot cover their other debts. Global cash flow is the test that looks at all of it at once.
Related terms
- Line of credit: A commitment from a lender to advance money up to a set limit, which a business can draw, repay and draw again as its cash needs rise and fall.
- Borrowing base: The most a lender will advance on a line of credit at a given time, set as a percentage of the eligible receivables, inventory or other collateral pledged.
- Term loan: A business loan for a set amount with a maturity of more than one year, repaid on a fixed schedule from the company's cash flow.
- SBA CAPLines: SBA's 7(a) lines of credit for short-term operating needs, in four types: Working Capital, Contract, Seasonal and Builders. The most for one line is $5,000,000.
- SBA 7(a) loan: SBA's main business loan program. A lender makes the loan and SBA guarantees part of it: up to 85 percent of $150,000 or less and 75 percent of more, on loans up to $5,000,000.
- Farm operating loan: A short-term loan or line that pays a farm's yearly costs, such as seed, feed, fertilizer and rent, and is repaid when the crop or livestock is sold.
- Debt schedule: A table of every loan a business or borrower owes, showing for each the lender, balance, payment, maturity date and collateral.
Sources
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.