Enough to run the business through its operating cycle and its worst month without new borrowing. Start from how long cash is tied up in receivables and inventory, net of what suppliers finance, then add what a new owner needs on top: opening cash, because the seller usually keeps it, payroll that falls due before collections come in, supplier deposits while credit is re-established, and the seasonal low. Fund it in the term loan, with a revolver at close, or with buyer cash. Trimming it to shrink the loan request is one of the most common reasons newly acquired businesses run short.
- Sized from
- The operating cycle, the first payrolls and the seasonal low
- SBA 7(a) maturity for working capital
- Up to 10 years
- Revolver advance on eligible receivables
- Typically 80% to 90%
- Receivables typically ineligible
- More than 90 days past invoice
- Common mistake
- Cutting working capital to make the loan request smaller
Why a new owner starts short of cash
Most businesses are sold cash-free, debt-free: the seller keeps the cash in the bank and pays off the business's loans, and the buyer receives the business with a normal level of receivables, inventory and payables. That normal level is set by the working capital peg. The peg makes sure the buyer is not handed a business with its receivables collected and its payables stretched. It does not give the buyer any cash.
So on the first morning after closing, the business has receivables that will turn into cash over the coming weeks, inventory that will turn into receivables, and bills and payroll that are due now. Several things make the first months harder than the seller's steady state:
- Payroll comes before collections. The first payroll may fall due within days of closing, while the receivables the buyer acquired take their usual time to come in.
- Suppliers may want cash. A supplier who gave the seller generous terms for years may put a new owner on deposit or cash on delivery until a payment history exists. Every day of supplier credit that disappears is cash the buyer has to find.
- Deposits and one-off costs. Utility and lease deposits, insurance premiums paid up front, new software, rebranding, and the cost of the seller's transition consulting.
- The seasonal low. A business that is comfortable on its annual average can be badly short in its slowest month, and a closing date just before the slow season lands the buyer in it at once.
Sizing it from the operating cycle
Working capital need is not a percentage of revenue that can be looked up. It comes from how the business collects, stocks and pays, and it is sized in two layers: the operating working capital the peg should deliver, and the cash the new owner needs on top of it.
Take a distribution business with annual revenue of 7,300, or about 20 a day, and cost of goods of 5,110, or about 14 a day. Customers pay in 45 days, so receivables of about 900 are always outstanding. The business holds 30 days of inventory, about 420 at cost, and pays suppliers in 30 days, so suppliers finance about 420. Operating working capital is 900 plus 420 less 420: about 900. If the peg is set at that level, the buyer receives it in the business at closing.
| Layer | How to size it | In the example |
|---|---|---|
| Operating working capital | Receivables plus inventory, less payables, at normal levels; delivered by the peg | About 900, in the business at closing |
| Opening operating cash | The cash the business needs in the bank to meet payroll and bills as they fall due; one practical check is two payroll cycles plus a month of fixed costs, tested against the monthly model | 300 |
| Lost supplier credit | Payables that turn into cash payments if suppliers put the new owner on deposit terms, for as long as that lasts | Up to 420 if all suppliers do it; say 200 if half do |
| Seasonal low | The deepest cash shortfall in a monthly model of the first year, starting from the closing month | 250 |
| One-off transition costs | Deposits, insurance, systems, consulting fees | 80 |
| Cash the buyer must fund at close | Sum of the layers above the peg | About 830 |
The numbers in the right-hand column come from the business's own records: the days sales outstanding in its receivables aging, inventory turns, payables timing, the payroll calendar and the monthly revenue pattern over two or three years. A lender will test each one, so each should be traceable to a document in the file.
Build a monthly cash model of the first year starting from the closing date. The month where it goes lowest is the working capital you need.
Three ways to fund it
Once the amount is known, it can be funded in the acquisition term loan, with a revolving line of credit in place at closing, or with the buyer's own cash. Most well-structured deals use two of the three.
| In the term loan | Revolver at close | Buyer cash | |
|---|---|---|---|
| How it works | Part of the acquisition loan is set aside for working capital and paid into the business | A line of credit sized to receivables and inventory, drawn as needed | The buyer contributes cash to the business beyond the purchase price |
| Effect on debt service | Adds fixed principal and interest from the first month | Interest only on what is drawn | None |
| Flexibility | Borrowed once; repaid on schedule whether needed or not | Draws and repays with the cycle | Fully flexible |
| Under SBA 7(a) | Allowed, with a maturity of up to 10 years; part of total project costs, so it raises the required 10% injection | Possible through SBA's CAPLines, or a conventional line beside the 7(a) | Counts toward the equity injection if contributed as part of the project |
| Best for | Permanent needs: opening cash, lost supplier credit | Seasonal and cyclical needs | Buyers with cash beyond the minimum injection |
The term loan is the natural home for the permanent part of the need, the cash the business will always hold. An SBA 7(a) acquisition loan can include working capital with a maturity of up to 10 years. Because working capital is part of total project costs, adding it raises the minimum equity injection too, by 10% of the amount added. That is usually a price worth paying.
A revolver suits the part of the need that comes and goes. Asset-based lenders typically advance 80% to 90% of eligible receivables and up to 85% of the net orderly liquidation value of inventory, or roughly half of its cost. Receivables more than 90 days past invoice are typically excluded, and borrowing bases commonly cap any single customer at 20% to 25% of eligible receivables. A business with concentrated or slow receivables will find its availability well below its receivables balance; how a borrowing base works sets out the arithmetic. How a revolver sits beside acquisition debt is covered in using a revolver in an acquisition, and SBA's own line in SBA CAPLines.
Buyer cash is the cheapest source and carries no payments, but most buyers need their cash for the equity injection and closing costs. Cash held back by the buyer outside the business is not working capital unless it is actually available to the business, and lenders will ask.
Why under-funding is so common, and what it costs
Buyers cut working capital for understandable reasons. A smaller loan needs less equity. It has a smaller payment, so debt service coverage looks better. And the seller's business has always run fine, so it seems the cushion is not needed. Each of those reasons misses the same point: the seller's business ran on the seller's cash balance and the seller's supplier terms, and the buyer has neither.
The pattern after closing is familiar. By the second or third month, a slow-paying customer, a supplier deposit and a payroll land in the same week. The buyer puts expenses on personal cards, stretches payables until suppliers complain, or takes a short-term advance. The last is the most expensive mistake. SBA will not refinance an active merchant cash advance. From 1 October 2026, an advance becomes eligible only once converted to a term loan that has amortized for at least 24 months with no new advance since. A buyer who takes one to cover a working capital gap can be stuck with it for years; the way out is described on MCA refinancing.
Adding working capital to the loan does cost coverage, but usually less than buyers fear. Suppose earnings available for debt service are 1,400 against annual payments of 1,000. Adding 500 of working capital to a 10-year loan adds principal of 50 a year plus interest, taking payments to roughly 1,100. Coverage still clears the 1.25x that conventional banks commonly look for, and that SBA will require on historical results for a change of ownership from 1 October 2026. How lenders run the test is on debt service coverage ratio.
The peg, the closing date and seasonality
Two decisions made before the financing is arranged change how much working capital the buyer has to bring. The first is the peg. If it is set below the business's normal level, perhaps by averaging months when receivables were unusually low, the buyer inherits a business that will absorb cash to get back to normal. Every unit the peg is set too low is a unit the buyer has to fund. What a working capital peg is covers how it is set and trued up.
The second is the closing date. A landscaping or HVAC business bought in late winter has to fund crews, fuel and materials for the season before the first spring invoices are paid. The same business bought at the end of its busy season comes with high receivables that will convert to cash. Neither is wrong, but the working capital line in the loan should match the closing date, not the annual average. Seasonal businesses are treated on seasonal lines of credit and, for one trade, on financing an HVAC company acquisition.
How to present the request to a lender
Lenders question working capital requests from both directions. An unsupported round number invites a cut. A request with no working capital at all invites the question of how the buyer will make the first payroll. What gets a working capital line approved is showing the derivation.
- A line for working capital in the sources and uses table, separate from closing costs.
- The receivables aging by customer, the payables aging and the inventory report, which support the operating cycle.
- A monthly cash model for the first year, starting from the closing date, with the low point marked.
- The peg as agreed in the letter of intent, and how it compares with the normal level.
- What is funded by the term loan, what by a revolver and what by the buyer.
Transparent builds the monthly cash model into the financing model for every acquisition, so the working capital request is derived from the business's own cycle and the lender sees the low month rather than being asked to trust a figure. Once the documents are in, the full lender package is built in a day; its contents are on the package.
Common questions
- Does SBA finance working capital as part of an acquisition loan?
- Yes. A 7(a) loan can include working capital with a maturity of up to 10 years. It is part of total project costs, so it also raises the minimum equity injection of 10%.
- If the working capital peg is set correctly, do I still need extra working capital?
- Usually. The peg delivers receivables, inventory and payables at normal levels, but in a cash-free deal the seller keeps the cash. The buyer still needs opening cash, a cushion for lost supplier credit and the seasonal low.
- Should working capital go in the term loan or a line of credit?
- Permanent needs, like the cash the business always holds, fit the term loan. Needs that rise and fall with the season or the order book fit a revolver. Many deals use both.
- Can I add a line of credit after closing instead?
- Sometimes, but a new owner with a few months of history under a new entity is a harder credit than the same business at closing. Arranging the line at closing, while the full file is in front of lenders, is usually easier.
- Will adding working capital hurt my debt service coverage?
- It adds payments, so coverage falls a little. In most deals the effect is modest compared with the risk of running short, and it can be tested in the model before the request is made.