For business loan brokers: This guide explains Working Capital Needs: A Business Loan Brokerβs Assessment Guide through the lens of evaluating a clientβs situation, preparing the file, and discussing financing options clearly.
There is no universal number, and anyone who gives the client one without asking about the client’s business is guessing. Working capital needs are driven by how fast money moves through the client’s business, not by the client’s size or the client’s industry averages.
What the client can do is calculate the client’s own number in about ten minutes. Here is how.
First, what working capital actually is
Working capital is current assets minus current liabilities. Current assets are things that will become cash within a year: the client’s bank balance, receivables, inventory. Current liabilities are what the client owe within a year: payables, accrued expenses, the current portion of any debt.
Working capital = Current assets − Current liabilities
Positive means the client can cover the client’s near-term obligations. Negative means the client cannot, at least not without new money coming in. That is the headline, but the headline is not the useful part.
The number that actually matters: the client’s cash conversion cycle
The real driver of how much working capital the client needs is how long the client’s cash is tied up between paying for something and getting paid for it. That gap is the cash conversion cycle, and it is the whole game.
Three pieces:
- Days inventory outstanding. How long stock sits before it sells.
- Days sales outstanding. How long customers take to pay the client after the client invoice.
- Days payable outstanding. How long the client take to pay the client’s suppliers.
Cash conversion cycle = Days inventory + Days receivable − Days payable
A restaurant collects instantly and pays suppliers on terms, so its cycle can be negative: customers fund the business. A manufacturer buys materials, builds for weeks, ships, then waits 60 days to get paid, so its cycle can be 90+ days. Same revenue, wildly different working capital needs. This is why industry benchmarks are close to useless for the client’s specific decision.
Working out the client’s number
- Calculate the client’s cash conversion cycle using the formula above, from the client’s own financials.
- Work out the client’s average daily operating costs. Take annual operating expenses and divide by 365.
- Multiply. Daily costs × cycle days is roughly the capital tied up in one full turn of the client’s business.
- Add a buffer. Most operators land somewhere around three to six months of operating expenses, depending on how volatile and seasonal their revenue is. The more lumpy the client’s income, the bigger the buffer needs to be.
- Add anything lumpy and known: a tax instalment, an annual insurance premium, a seasonal inventory build.
That gives the client a defensible number rather than a feeling.
The ratio lenders look at
Lenders will usually look at the client’s current ratio: current assets divided by current liabilities. Conventionally, below 1.0 signals the client cannot cover near-term obligations. Comfortably above 1.0 signals the client can. Very high can suggest cash sitting idle rather than being deployed, though few small businesses have that problem.
Treat it as a rough signal rather than a target to game. Underwriters look at trend and context more than the raw figure.
Signs the client is running too thin
- The client time supplier payments around when specific customers pay.
- A single late invoice creates a genuine problem.
- The client has turned down work because the client could not fund the delivery.
- The client is using a credit card to bridge payroll.
- The client cannot take a bulk discount because the cash is not there.
That last one is the quiet killer. Being under-capitalized does not just create stress, it makes the client permanently less competitive than the operator who can buy well.
Fixing a gap
The client has three levers, and financing is only one of them:
- Shorten receivables. Invoice immediately, tighten terms, chase properly, or use invoice financing to turn receivables into cash now.
- Lengthen payables. Negotiate terms with suppliers. Free, and routinely under-used.
- Fund the gap. A line of credit is purpose-built for this, because the client draw only what the client needs and pay interest only on what the client draw. A term loan is the wrong shape for a recurring gap.
Where Levr fits
Levr helps business loan brokers collect client information, organize documents, prepare lender-ready applications, and manage lender conversations while keeping the client relationship.
Create a free Levr.ai profile and see what is available to the client’s business.
Frequently asked questions
How much working capital should a small business have?
There is no single figure. Calculate it from the client’s own cash conversion cycle and daily operating costs, then add a buffer sized to how volatile the client’s revenue is. Many operators target roughly three to six months of operating expenses.
What is a good working capital ratio?
A current ratio comfortably above 1.0 generally indicates the client can cover near-term obligations. Below 1.0 is a warning sign. Context and trend matter more than the exact number.
Can working capital be negative?
Yes, and it is not automatically bad. Businesses that collect from customers before paying suppliers, like many restaurants and subscription businesses, run negative working capital by design. It is dangerous for businesses that do not have that structure.
What is the best financing for working capital?
Usually a line of credit, because the need is recurring and unpredictable and the client pay only for what the client draw. Invoice financing suits businesses whose cash is stuck in receivables.
The bottom line
The client’s working capital need is a function of the client’s cash conversion cycle and the client’s daily costs, not the client’s industry. Calculate it, add a buffer for volatility, and fix a gap with the right tool: faster collection, longer payables, or a facility built for recurring needs rather than a lump sum the client did not need all at once.
Related reading: Business loan vs. line of credit · Accounts receivable financing · All loan types
This article is for general educational purposes and is not financial, legal, or tax advice. Levr.ai is not a certified accountant or financial advisor. Consult a qualified professional for advice specific to the client’s situation.
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