Financial constraints in developing countries limit access to credit, affecting firms' ability to manage working capital. A new model shows that firms facing constraints adjust labor and capital in response to demand changes, leading to countercyclical investment. Constraints bind when positive opportunities arise, limiting output growth. Simulations suggest that models without working capital may underestimate the impact of constraints on efficiency and growth. Evidence from a Bangladesh survey supports the theory, showing that constrained firms invest less when prices rise and have dampened output responses to positive shocks. Policy efforts to ease credit constraints should focus on high-demand periods to boost growth.