Every business requires a constant flow of cash to meet its regular expenses such as salaries and wages, raw material, administrative expenses and so forth. The question, therefore, is how to ensure this regular flow of cash?
The Need for Working Capital
Working capital refers to the daily inflow and outgo of cash in any business. It is also described as the difference in assets and liabilities of a business. It is the cash that lies in the coffers and is used for day-to-day expenses. Working capital may variously be used for:
- Maintaining an optimum level of inventory
- Paying creditors on a timely basis
- Maintaining a cash reserve
- Managing short-term debts
- Meeting unforeseen or unpredictable expenses
- Bridging gaps in payment by debtors
- Taking advantage of seasonal discounts and offers from suppliers
- Upgrading equipment
- Meeting heavy expenses during peak seasons
- Covering off-season expenses
- For specific projects such as a pre-season marketing campaign
- Paying temporary employees who are hired for particular projects or to manage a heavy workload
- Leveraging opportunities
- Meeting tax liabilities
- Meeting unforeseen expenses
- Paying experts and consultants hired for specific purposes
- Improving the creditworthiness of the business, which, in turn, will help acquire credit from suppliers
There may be other similar reasons for which businesses may take a working capital loan.
How Much Working Capital Does a Business Need?
Determining the amount of working capital you need for your business can be tricky as it varies not only with the type of business you have but also with seasons, situations, market conditions and more. One way to compute your working capital needs is to determine how fast your current assets – such as debtors, receivables and inventory – can be converted to cash and estimate your daily cash outgo or current liabilities. You can then determine how much “margin” you would like to maintain between your current assets and current liabilities. This determines the amount of working capital your business would require.
If you have been in business for a few years, you will have historical data to help you arrive at estimates. If you are in a seasonal business that peaks at certain times during the year, you must factor this into your computations since your expenses may not be evenly spread out – and neither would your income. Similarly, you need to factor in other anomalies of your business into your computation.
Having determined the amount of working capital you need for your business needs, the next step is to determine the exact amount of loan you require. In order to do this, ask yourself –
- Why Do I Need The Loan?
- For How Long Will I Need The Loan?
- How Much Interest Would I Pay?
- What Are My Future Receivables/Assets That Can Help Me Repay The Loan?
Most banks and NBFCs have an online EMI calculator that you can use to work out the EMI (equated monthly instalments) you would pay for the term of your loan. This figure can help you further in determining the amount of credit you need and the duration thereof.
Sources of Obtaining Working Capital Loan
Depending on the amount of loan and the duration for which you need it, working capital loans can be categorised as short- or long-term loans.
Short-term loans: Short-term loans are taken for short durations – usually a year or less – and are used to fund a temporary shortage of cash. These loans are typically collateral-free and often granted as an extension of an existing account with a bank – for example, an overdraft. These loans may also be issued against future receivables such as discounting bills. Credit cards are another way to obtain short-term finance, but the amount of funds depends on the card limits, and interest rates can be considerably high. Some entrepreneurs delay payment to suppliers or request advance payment from their customers and utilise the extra cash to fund their operations.
Long-term loans: Long-term loans – or loans taken for more than a year – are usually taken for a specific purpose such as purchasing an asset. Most lenders demand collateral for long-term loans. There is also a broader investigation into the creditworthiness of the borrower. Banks and NBFCs (non-banking financial institutions) offer long-term loans to their customers subject to specific terms. The borrower must be able to show proof of income, proof of residence and proof of identity and age to obtain a long-term loan. The limits on the amount of credit, term and other conditions vary from one lender to another.
To learn what kind of loans your business can avail, reach out to us at FinanSME – where borrowers can meet lenders to obtain the much-needed funding for their business.
In order to ease pressure on cash flow and facilitate smooth running of business, FinanSME helps provide Working Capital Loan facility to its partner SMEs. Our Bill Finance facility plugs in the mismatches in the cash flow and relieves the SMEs from worries on commitments.
Strong Data Driven Accreditation Process
Our strong accreditation process ensures that all of your transactional history is recorded with us and then reported back to our Financial Institution partners. This ensures availability of the SME’s transactional data with Power2SME and helps reduce the processing cycle time for the loan significantly, once all necessary documents have been submitted and approved.
We aim to effectively partner with SMEs at every step in their journey and help them enhance productivity by multifold. We look to engage with them to understand your working capital needs and growth plans well, so we can ascertain and provide the appropriate working capital they need for their growth
What you stand to gain:
- Discounting of bills up to original tenure of 120 days
- Lending rate of as low as 14.5%* p.a. (*Conditions Apply)
- Collateral free loans
Write to firstname.lastname@example.org to learn more!