What is the difference between revolving working capital and permanent working capital?
Revolving working capital is used to finance the day-to-day operations of a business (i.e., all expenses, except owner’s salary). It is usually set up as an interest-only line of credit in which the borrower can take advances up to a certain level. The lender generally requires that the borrower rest the line (bring the balance down to zero) for a period of 30 consecutive days each year. If the borrower is unable to rest the working capital line, the lender may “term-out” the portion of the line that the borrower cannot rest and convert it to permanent working capital. Permanent working capital is typically used to finance a permanent investment in inventory or accounts receivable. Permanent working capital loans are usually structured as term loans. The maximum term of a guarantee on a loan made to fund permanent working capital is 7 years. The maximum term on revolving working capital is 2 years.