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Who funds working capital when you buy a business?
In most asset purchases, you do — and the number is frequently larger than the down payment.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
Who funds working capital at closing when I buy a business?
In a typical asset purchase, receivables and payables stay with the seller, so the buyer funds the entire operating cycle from day one. In an illustrative business with 2,400,000 of revenue, a 41-day collection cycle and 38 days of stock against 27 days of supplier terms, that is roughly 313,000 of net working capital plus a payroll cushion — a day-one requirement that often exceeds the equity injection. Fund it deliberately: include working capital in the financed amount, negotiate a working capital peg in a stock purchase, or buy the receivables from the seller at a discount, but never assume it will resolve itself.
The purchase price buys the business. It does not buy the cash that makes the business run, and in most small acquisitions the two are funded separately and only one of them is planned for.
Why the gap exists
In an asset purchase — the structure most small deals use — the buyer typically acquires the equipment, inventory, contracts, intangibles and goodwill. Receivables and payables typically stay with the seller, who collects what is owed and pays what they owe.
That means on day one you have a business with customers who will pay you in 41 days, suppliers who want paying in 27, payroll due on Friday, and no receivables to collect because they belong to the seller. The operating cycle has to be funded from scratch.
Sizing it
- Receivables: 2,400,000 ÷ 365 × 41 = 269,589
- Inventory: 1,440,000 ÷ 365 × 38 = 149,918
- Payables: 1,440,000 ÷ 365 × 27 = 106,521
Net working capital: 312,986. The cash conversion cycle is 52 days.
Add a payroll cushion. If payroll is roughly 55 per cent of operating expenses on a fortnightly cycle, two cycles is about 33,000. Day-one requirement: 345,986.
Against a purchase price of, say, 1,150,000 with a 10 per cent injection of 115,000, the working capital requirement is three times the down payment. This is the single most common reason a well-priced acquisition gets into difficulty in its first quarter.
Where the money can come from
The cycle can also be shortened
Funding is one lever; the cycle itself is another, and it is cheaper. Every day removed from the cash conversion cycle in the example above releases about 6,082 of cash permanently.
Concretely: collecting in 34 days instead of 41 releases roughly 46,000. Negotiating 38-day supplier terms instead of 27 releases another 43,000. Neither requires a lender's approval, and both are easier to implement in the first weeks after a change of ownership than later, because customers and suppliers expect new arrangements from a new owner. Decide your terms before closing and communicate them in the first week.
The mistakes that cost the most
- Assuming the seller's receivables come with the business. Read the asset purchase agreement's excluded assets list. This is stated there and it is routinely skimmed.
- Forgetting the payables normalisation. If the seller has stretched suppliers to 60 days and the suppliers expect you to be at 27, the difference is cash you have to find in the first month.
- Missing customer deposits and deferred revenue. If customers have paid in advance for work not yet done, that obligation transfers to you in practice even where the cash stayed with the seller. Get an adjustment for it at closing.
- Missing accrued payroll and accrued vacation. Staff who transfer bring accrued entitlements. Price them.
- Sales tax and payroll tax timing. The first filings after closing can cover periods spanning the transaction.
- Treating the working capital line as a contingency. It is not a buffer; it is the money that pays wages in week two.
What to do before you sign
- Compute net working capital from the seller's last three balance sheets and take the average, not the closing-date figure, because sellers manage the closing-date figure.
- Compute the cash conversion cycle and multiply it out as above. Write the number in the model next to the purchase price, with equal weight.
- Ask the lender, in writing, how much working capital they will include and on what terms.
- Ask the seller to sell you the current receivables at a negotiated discount, and get the aged detail before you price it.
- If it is a stock purchase, agree the working capital peg, the definition of each component, the measurement date and the true-up mechanism, in the purchase agreement.
- Build a 13-week cash forecast for the period after closing, starting from zero receivables, and check that it never goes negative. If it does, you have found the size of the problem while you can still solve it.
Where this applies
Related questions
Who funds working capital at closing when I buy a business?
In a typical asset purchase, receivables and payables stay with the seller, so the buyer funds the entire operating cycle from day one. In an illustrative business with 2,400,000 of revenue, a 41-day collection cycle and 38 days of stock against 27 days of supplier terms, that is roughly 313,000 of net working capital plus a payroll cushion — a day-one requirement that often exceeds the equity injection. Fund it deliberately: include working capital in the financed amount, negotiate a working capital peg in a stock purchase, or buy the receivables from the seller at a discount, but never assume it will resolve itself.
Which funding products does this apply to?
Working Capital, Term Loan, Business Line of Credit, SBA Loan, Invoice Financing. Each has its own page listing the funders in this directory that offer it and what each one publishes about its terms.
Is this specific to construction?
It is written around how a construction business actually generates and collects cash, which is what makes its funding problem different. The mechanics transfer; the arithmetic may not.
Who writes this?
The Find Me Funders research desk. Some drafting is AI-assisted, and every page that is says so at the top, including whether a person has checked its claims yet.
How do I know a figure here is right?
Where a page carries the green notice, its claims were checked against the sources listed at the end and a reviewer is named. Where it carries the amber one, nobody has verified it yet and you should confirm anything you plan to act on.
Are the examples real deals?
No. Every worked example is labelled illustrative and exists to show the arithmetic. What any particular lender charges is on that lender's page, where it publishes it.
Why do you never say what a typical rate is?
Because we cannot source it. A market average assembled from lenders who do not publish prices is a guess with a decimal point on it. Where a lender publishes a figure, we show that figure and say where it came from.
Is this financial or legal advice?
No. It is general information about how these products work. Outcomes depend on your contract and your state, and a lawyer or accountant licensed where you are is the person to ask about your situation.
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