An Example of How a Working Capital Loan Benefits a Business
Imagine you are running a custom shoe manufacturing company. You have assets worth $6,000 and liabilities worth $2,000. That means your net working capital is $4,000. Why would you need a small business working capital loan?
As a shoe manufacturer, let us say you usually get ten orders a month. Your $4,000 is sufficient to pay salaries to staff and pay suppliers, all in a bid to manufacture ten pairs of shoes each month.
What happens when another company contacts you and makes an order for fifty pairs of the product for next month? That is too good a project to pass up, but your $4,000 may not be enough to meet the cost of raw materials and cover salaries for old and new staff to fulfill that order. In such a situation, you take on a working capital loan. Consequently, you fulfill that order, and despite having to pay the fee for your loan, you manage to make a very good profit.
With a loan of this kind, you would be able to accept such big orders. That is what adding more funds into your kitty does to your business—it helps you make extra profit.