Reasons Why You Might Be Failing At Working Capital Management

Small and medium enterprises are particularly vulnerable to improper management of their assets and liabilities. Most SME assets are in the form of current assets and their current liabilities are often a source of external finance, given the difficulties of getting a business loan for such enterprises. Oftentimes, SMEs have to resort to vendor financing when facing a capital crunch. Therefore, efficient working capital management becomes critical for the success of a small business in India.

Working capital is the difference between your current assets and current liabilities. It is primarily used for supporting the day to day financial operations, such as the purchase of stock, salary and wage payments, and financing credit sales. In essence, working capital is the lifeblood of a business.

Working capital management is the managerial strategy for creating a balance between the two aspects of working capital i.e. current assets and current liabilities. Working capital management ensures that there is enough cash flow for meeting short-term debt and operating expenses. Efficient management of working capital is a part of effective corporate strategies and helps in creating shareholder value. However, maintaining the liquidity of a firm is also an important part of working capital management as increasing profits at the cost of liquidity can also have serious ramifications for an SME. In case, profits are ignored, a firm cannot conduct operations for long, and if liquidity is ignored, the firm may face insolvency. So, working capital management should be given due consideration in strategic management of a company.

If your cash flow is constantly at odds with your working capital requirements, the reason might be a de-synchronization between one or more of working capital determinants. Here is a list of working capital determinants / reasons why your firm is struggling to acquire the necessary working capital buffer for operational expenses and short-term debt obligations.

Nature of business:

The type of business your company is involved in does have an impact on your overall working capital requirements. For example, trading and investment firms very little capital in form of fixed assets but do require larger working capital funds for operation. On the other hand, firms offering public utilities do not have a huge working capital requirement but do need to invest in fixed assets. So, the first thing you need to check is whether the nature of your business is properly aligned with your financial policy for generating the working capital.

Sales and demand:

Working capital also has a relationship with the volume of sales. Again, this relationship varies based on the type of your business but in most cases requires the deployment of fixed assets to spur growth. So, if yours is a growing enterprise, make plans in advance for a continuous change in working capital needs – and how you are going to meet them – as per the existing sales and demand scenario.

Manufacturing technology:

If you are manufacturing products, using the right technology is crucial for better working capital management in your enterprise. Manufacturing has a direct relationship with increase or decrease in working capital funds. The longer the manufacturing cycle, the higher the firm’s working capital requirements. This, pick and choose the right technology to streamline your working capital and manufacturing process.

Credit policy:

If you have a credit policy that differs too much from the norms in your industry, you may find yourself having working capital troubles. It is good to be able to offer better credit terms to your buyers as the part of your customer acquisition strategies, but it is similarly important to limit that flexibility within the constant of industry norms and practices.

Operating efficiency:

Another factor that relates to the delivery of goods and services is the operating efficiency of your business. It has a direct effect on your working capital requirements. Pushing your operating efficiency to the maximum will not only decrease your working capital requirements but also improve your profit margins.

Price Level Changes:

Change in the price of raw materials, packaging for finished goods, transportation and sales costs, can also increase or decrease your working capital requirements. Being able to anticipate and adjust accordingly to these price level changes is a part of effective working capital management. If you are being let down by the volatile price level changes, consider hiring an expert to stabilize your working capital and other financials.

Supplier Credit:

A firm’s working capital requirements are also subject to supplier credit. If your supplier trusts you enough to grant higher credit in lieu of raw or unfinished goods and services, it can reduce your immediate working capital needs. So, cultivate stronger relationships with select suppliers instead of regularly switching from one to other.

Institutional Finance:

Lastly, the type of institute credit available for your business also has an effect on working capital requirements. If you can get business loans easily, your working capital needs will not suffer. But if your business loan applications are continuously being put on hold, it may not bode well for your working capital and cash flow. In such cases, try applying for a business loan with non-banking financial companies offering working capital finance for SMEs. For example, Lendingkart Finance is a FinTech firm that offers business loans up to ₹ 1 crore without any collateral requirements. Lendingkart’s business loan offers include approval and disbursal within 3-days of verification, which makes it instant business loan, faster even then the Indian government’s ‘MSME 59 minutes loan’ offer.

We hope, these pointers for identifying working capital issues will help you manage your organisation better and grow organically. To know more about working capital finance and how you can get small ticket short-term finance for your growing business, email us at info@lendingkart.com or call us on 0124-3864889.

Things to Know When Making Your Wife a Guarantor for Your Business

Most small and medium businesses need to stabilize before they can make profits. This initial phase requires capital and may make or break a new business venture. That is why most startup owners look for funding or business loans to meet their immediate asset creation and working capital needs. Now, getting a business loan can be a harrowing experience if it is your first ever project. Indian banks are already reeling from a bad loan crisis and are particularly wary of lending to new SMEs. Plus, banks need a guarantor who will vouch for you in case of a loan default.

What is the role of a guarantor?

A guarantor is the surety provider for repaying a debt if or when the original borrower fails to repay the debt. He or she signs a document to that effect and hence the guarantor is contractually obliged to repay the debt of the principal borrower in the case of default.

According to a Supreme Court of India verdict, the guarantor becomes equally liable for repaying a debt when a loan goes bad. Therefore, if you have made your wife or a close relative your guarantor for a small business loan, chances are that they will be dragged into legal troubles if you fail to service the liability.

Furthermore, the loan contract also gives the lender the power to attach the property of a guarantor (in this case the wife) to recover the loan amount.

How to safeguard your wife’s assets in advance?

There are two scenarios in which a lender cannot attach the asset of your spouse in a loan default recovery case.

  1. Register your business as LLP: New businesses are run under several categories such as sole proprietorship, partnership, Limited Liability Partnership (LLP) or private limited. In case of LLPs, the assets of inactive partners cannot be attached in a loan recovery lawsuit.
  2. Set up a Parental Trust: Discretionary trusts set up at the time of a daughter’s marriage are also exempt from business loan recovery proceedings. Having one set up for your would-be wife can help minimize personal asset loss in case of a business failure.

Instances when a lender cannot hold your wife liable in case of a business loan default

  • If a woman has no direct or indirect role in her husband’s business, the Married Women’s Property Act prevents lenders from attaching her belongings in the case of loan recoveries.
  • If the husband and wife are joint holders of a disputed asset, the lender has to reimburse the wife’s portion upon liquidation of the asset.
  • If your wife is a director in the company but not the guarantor, her assets cannot be seized by the lender.

Avoiding the hassles of a business loan from banks

As you can see, there is a lot of hassle and risk involved in securing a business loan from a bank. The red tape, the bureaucratic process and finally the stringent terms dictating recoveries are simply not worth the trouble in this modern day and age. Switching to alternate means of business finance can save you all that trouble and facilitate fast business loans at the same time.

Non-banking financial companies, or NBFCs as they are popularly known, offer instant business loans without any collateral and have a flexible recovery process that allows you a chance to settle the dues. Here are some of the benefits of applying for a business loan with an NBFC.

  • Online application and processing allow faster business loan approvals.
  • Money is transferred directly into your bank account and instantly available for exploiting new business opportunities.
  • Minimal processing charges and lower interest rates reduce the payback burden on your books.
  • Break down your loan repayments in bi-weekly or monthly installments or repay early without a worry as there are no prepayment charges.
  • Reapply for a business loan and get the previously sanctioned loan amount instantly.

These benefits, not only allow you to get loans quicker but also help your business grow faster, which means you are better equipped to face a financial blowback. Moreover, the recovery process is also very business friendly as NBFCs allow you to restructure your loans in cases of market upheavals.

Concluding thoughts

When you are setting up a new business, it is always a wise thing to have a comprehensive look at the business scenarios that will benefit you and the scenarios in which things can go south. Making your wife a guarantor for your business loan liabilities is one of those things. While, initially, it may seem like a good choice if your wife has a business of her own or has significant personal wealth, you may soon realize your mistake if things do not work as planned on the business front. Thus, taking some prudent steps in advance will help you and your wife avoid simultaneous bankruptcy. Moreover, financing your business through a FinTech lender like Lendingkart may be a better alternative altogether. Non-banking financial companies offer business-friendly financial products and services, and are better suited for small and medium enterprises looking for business loans up to ₹ 1 crore.

Want to apply for a business loan with Lendingkart? Check your Eligibility.

Why a Business Loan is Better than Liquidating Personal Savings or Assets

A number of external and internal factors can disrupt the finances of a small business. In many such cases, these financial disruptions require urgent capital infusion to keep the business competitive. While every small business owner would like to avoid such difficulties, sometimes getting financial help is the only answer.

Now, in Indian society, there is an inherent belief that taking any type of debt should be avoided. So, when we run into financial troubles, the first things we think of liquidating, are our personal savings and assets. The general wisdom is that those funds or assets can be reacquired, once the business returns to normal again.

Well, while it may be prudent to utilize funds from your savings to start a new business, doing so for an already established business doesn’t make sense. The reasoning behind this is quite simple. When you save before starting a new business, you are inadvertently putting some of the money aside for that purpose in your mind. However, when you accrue savings from an ongoing venture, you are putting that money aside for personal use. By utilizing those funds, you are cutting back on your and your family’s financial freedom.

One can argue that using savings to offset temporary financial difficulties without going into the hassles of getting a business loan or it allows you avoid losing money on interest repayments. At a cursory glance, these arguments may seem valid but there are many benefits of getting a business loan which are not always apparent.

Let’s have a look at some of the advantages of taking a business loan and analyze them in contrast to using personal savings for business use.

  • When you utilize your savings for meeting urgent business needs such as working capital finance, you effectively use up the funds that were meant for personal pleasure or emergencies. Now, if a personal situation arises which involves spending money, you have to resort to borrowing, which you were trying to avoid in the first place. Personal loans from banks and private money lenders come with interest rates as high as 36% per annum whereas business loans are offered at relatively lower interest rates and have many add on benefits.
  • It is easier to get business loans these days. Non-Banking Financial Companies like Lendingkart have revolutionized the Indian financial market for small and medium enterprises. Firms like Lendingkart are offering business loans at short-term small ticket finance to eligible SMEs in record turnaround time. A business can secure business loans of up to 1 crore within 3 days’ time.
  • By taking a business loan, you keep your savings free for alternate investment. If you are a prudent investor, you can offset the business loan EMIs by earning interest on your savings. This is a much better way to utilize your savings instead of using them outright for financing your business.
  • Taking a business loan also helps improve your business’s credit rating. A business loan connects your business to the financial grid, allowing credit rating agencies to assess your venture’s financial health and assign a rating. This credit score is one of the most important parameters used by financial institutions and investors when you are seeking funds for a future expansion of business. Repaying your business loan on time increases your credit score over time, establishing you as a reliable trading partner on the market. Once again, NBFCs like Lendingkart Finance have made it easier to secure business finance than traditional banking institutions which are often marred by bureaucratic delays and stringent requirements.
  • Business loans also allow you to claim tax benefits as the interest paid on a loan is tax deductible. So, in essence, on one hand you are earning interest on savings and on the other you are saving through tax benefits, a win-win.
  • Last but not least, a business loan gives you the flexibility borrow money again and again once you establish your credentials with a lender. For instance, Lendingkart gives you the facility to re-take a business loan upon complete repayment of an existing loan. This facility is especially beneficial for businesses seeking short-term working capital loans to streamline their finances.

Getting a business loan from NBFCs like Lendingkart

Also known as FinTech firms, non-banking financial companies like Lendingkart cater exclusively to small and medium businesses. Therefore, these financial companies are able to cater to the specific demands of a small business such as quick finance, flexible EMI options and competitive interest rates. Lendingkart is India’s leading non-banking financial company, having disbursed business loans in more than 600 cities.

Here are some of the salient features of Lendingkart business loans:

  • Online application process using web login or the Lendingkart App
  • Quick turnaround time of 3 days for approved loan accounts
  • Minimal documentation requirements
  • Loan amount based on current revenue / sales with an offer to increase the credit limit with increase in revenue / sales.
  • Short-term business loans that range between 1 month and up to 2 years.
  • One-time processing fee of 2% on the loan amount, waived upon renewal.
  • No prepayment charges or penalties if you decide to repay the loan amount early.

In Conclusion

So, while the idea of using your personal savings to overcome financial difficulties may seem lucrative at first, the benefits of getting a business loan are simply too many and too good to ignore. As pointed out earlier in the article, using your personal savings for starting a new venture is a different thing altogether as you have already earmarked some of that money for business investment. It might even be essential as most public and private lenders will be unwilling to lend to a newly established business. However, once things are setup and running, business loans become a better option for financing your working capital needs and business expansions. They allow you to separate your professional and personal finances and ensure that you have ready money for both types of opportunities and emergencies.