Types of Working Capital

Working capital is a measure of a company's short-term financial health and operational efficiency. It represents the difference between a company's current assets and current liabilities.

 

Current assets are the things the company owns and which can be converted to cash within a year (e.g., cash, inventory, accounts receivable). Current liabilities are short-term debts or obligations due within a year (e.g., accounts payable, short-term loans).

 

Different types of working capital can help ensure seamless operations of establishment in various circumstances. From temporary to special to seasonal, there are numerous options that you can explore. It is essential to know the types you can choose from to select the best one.

Here are the different types of working capital loans a business can apply for based on their requirements:

1. Permanent Working Capital

Permanent Working Capital, also known as fixed working capital or hardcore working capital, is among the various types of working capital a business requires to function smoothly. In simple terms, it is the amount required to pay off the liabilities.

 

Often, this payment is necessary before you can convert assets or invoices into cash, as it creates a gap in your operational cycle. However, by managing your finances, you can secure enough fixed working capital to bridge the gap.

2. Regular Working Capital

Regular Working Capital refers to the funds that a business needs for daily functions. For stable operations, businesses need to maintain adequate regular working capital.

 

Although similar, it is different from permanent working capital in the sense that the latter is for the business operations as a whole. Regular working capital includes regular payments for purchasing raw materials regularly, salary payments, and more.

3. Gross & Net Working Capital

Both Gross and Net working capitals in financial management depend on the assets and liabilities of the business. The gross capital refers to the company’s total assets before considering any liabilities.

 

These assets generally have high liquidity, enabling you to quickly convert them into cash. Some examples include:

• Accounts Receivable

• Cash

• Short-Term Investments

• Marketable Securities like stocks

 

Net working capital refers to the ratio of current assets to current liabilities. In simple terms, it is the difference between gross working capital (assets) and current liabilities. Depending on the difference, you can classify this capital into positive and negative working capital.

4. Negative Working Capital

When the current liabilities of a business are higher than its assets, there is a shortfall or deficit. In such cases, the net working capital would be negative and therefore known as negative working capital.

 

In simple words, short-term debt is more as compared to short-term assets. With a negative working capital, the business would generally acquire funds from outside. When this working capital management is done well, it can be a great way to secure business growth.

5. Reserve Working Capital

With Reserve Working Capital, the business maintains capital over and above its daily or regular requirements. The capital acts as a contingency for unexpected market opportunities or situations, such as natural calamities, strikes, and more.

 

Simply put, reserve working capital is for unexpected and regular requirements. For example, you may need to urgently fix the interior of your office. You can also use this capital to leverage an opportunity that may pass on if you wait to acquire the funds otherwise.

6. Temporary Working Capital

Temporary Working Capital is a working capital generally to meet temporary or seasonal business needs. For example, a festive season may cause a rise in demand, requiring additional funds.

 

The requirement is not throughout the year, hence the name temporary. However, given its nature, it is also often regarded as variable working capital. The additional requirement may appear due to any reason, including economic and industry changes.

 

Businesses may also take out a short-term business loan to meet these requirements and repay it as soon as the cash flow is restored.

7. Special Working Capital

Special Working Capital is the working capital that a business would need due to a special event that normally does not occur. It has no basis to forecast and has rare occurrences normally. For example, a business may have to host to contribute to an award function or campaign necessary for growth.

 

Such events would generally require a large amount of funding that one may not have accounted for otherwise. As such, it is one of the different types of working capital loans commonly used to meet expenses without any hassles.

8. Seasonal Working Capital

Every business/industry has a peak season throughout the year, and during this time, it generally requires additional funding. To fulfil this requirement, businesses have a seasonal working capital.

 

Generally, businesses that offer products or provide services catering for a particular season require seasonal working capital. For example, the manufacturer of raincoats and umbrellas will likely need additional funds during monsoon as the demand and sales may increase.

Reference of all T&C necessarily refers to the terms of the Partners as regards to pre-approved offers and loan processing time amongst other conditions.