Business Strategy, Credit KnowHow, Financial Management, General Finance

Small Business Loans – The Working Capital Angle

Ever since I started off in a retail lending team at HDFC Bank and even now, as a decision-maker in one of the leading fintech lenders of the nation, I have always been asked by clients about the kind of business loan that would be the best for every situation. Simply put, there is no single loan that comes with a ‘one-size-fits-all’ feature. But when it comes to which business loan can be used in many situations, if not all, I could lead you through my insights and let you decide for yourself why working capital loans offer the best advantages. The current market scenario is rife with financial options to help in the smooth running of any business, small or big. These options could include multiple banks and NBFCs or even new age fintech firms like us, the Lendingkart Group. Though the sources are a dime a dozen, availing business finance through official channels is always bound by regulations and people resort to borrowing from friends and family or the local moneylender.



Cut your Coat according to your Cloth

Not just the textile or garments industry, rather every business is required to follow this. You need to know your needs before deciding to apply for a loan. Just like, when you buy a car, it is aligned to your primary needs. Purchase and leasing of commercial space, machinery or a plant are typically long term spends, while rotation of stock, availing cash discount through upfront payment to supplier/seller in purchasing stock are short-term spends. The first options of spending normally are categorized as capital investments and will require a term loan, either secured or unsecured. This loan will be of a sizably longer tenure and will not allow a penalty-free pre-closure when availed. But for small businesses, capital investments are usually few and far between. Purchase of stock with cash discount, stock rotation, covering payroll deficit, paying mid-year taxes are expenses that demand immediate attention and do not have the luxury of waiting out the approval period of a term loan. A working capital loan, on the other hand, ranging from as paltry as INR 1 lakh to as large as INR 1 crore can be availed in a much shorter time frame and be used to fill the gaps in cash flow efficiently. With a short tenure available in working capital loans, small businesses can rotate the funds invested many times a year, effectively fulfilling their financial needs as well as staying out of any unwanted credit trap. If a businessman is careful enough with the financing provided, there will be no dearth of funds from his/her lender towards working capital. In addition to this, working capital loans from Lendingkart also feature easier financing, lesser paperwork, and an online process that can be tracked. Flexible repayment options and zero penalties on pre-closure or advance payment of the loan make these loans from us, extremely lucrative. Getting a term loan to support your smaller recurring spends like stock rotation or payroll management is like stepping into quicksand without a lifeline. Longer tenures of a term loan affect cash flows for the business in the short term, pre-closure penalties can be 2-5% of the pending loan amount and overall, it becomes quite a sticky situation. One that at least I wouldn’t want to be in. What about you?



Other Financing Options – Through the Looking Glass

For non-retail businesses, the MUDRA scheme under SIDBI offers loans to SMEs and MSMEs but banks authorized to approve loans through the scheme mostly downplay any such requests. A businessman can try going around in circles and might strike gold through these loans, but it is time and resource intensive. Thus, not a really bright option, especially if your small business is still growing and needs your undivided attention. Your time should be devoted towards improving your working capital cycle, nothing else. Some people have also suggested to me that a business credit card could compete with a proper working capital loan. I beg to differ. First off, a credit card can offer only a very limited amount of financing, which can never be at par with a genuine working capital loan. Secondly, the 45-day interest-free period might sound lucrative, but it often leads people to delay their repayments and subsequently makes them suffer exorbitant interest rates. Non-repayment will result in an obnoxiously large fine, based on the dues. Even if you transfer the dues to another card, unless and until you have a really good fortune, you will fall into a bad credit trap that will damage your credit history by miles. Your business needs should remain at the forefront when choosing a business loan. Anywhere you approach for a business loan, your company and its financials will be scrutinized and the lending company will follow its own processes for approval and offer a loan amount in accordance with the leverage that you already have. When it comes to working capital loans though, we at Lendingkart, have ensured that our online process is simple and that our team offers the optimal amount of loan suitable for your short term working capital needs.

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Harshvardhan Lunia

Harsh started his passion for finance right from ICAI in 1998, his zeal for business in 2007 from ISB and has been keen on the ways fintech can shape the future of Indian economy ever since his first job. He is the CEO and Co-founder of Lendingkart Technologies Pvt. Ltd. Talking business and strategy have taken up his slots for hobbies, and thus have been the driving force behind the working of the Lendingkart Group.