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.

How an Unsecured Business Loan is the Safest Bet for Growing Your Business?

When you are planning to raise short-term finance, an unsecured loan can be the best way to do so. The safety offered by an unsecured small business loan is one of its primary selling points. You are not required to put up equipment or property as collateral when applying for an unsecured loan. Notwithstanding the fact that most small businesses lack adequate collateral assets, the elimination of this requirement makes these small business loans more accessible for MSMEs.

Moreover, the entry of NBFCs has further democratised the Indian small business loan market. New age lenders use the power of internet, cloud computing, big data and AI to process loan applications faster and with higher disbursement ratios than their banking counterparts. For example, applying for a business loan online with Lendingkart can get you the money in as less as 72 hours while a bank takes at least 7 days to process the same application.

Here is how a small business loan helps in your company’s growth.

Ensures operational successes

Every business relies on operational stability to earn profits. A small business loan allows you to purchase raw materials, finished goods, or other items that you need to keep in ready stock. Furthermore, you can also utilise the loan funds to pay wages and salaries, and clear immediate bills and expenses.

A small business loan also helps you in working capital management when your bills receivables get delayed or there are unexpected operational costs to be taken care of.

Safeguards your bottom-line

By offering quick and easy liquidity, small business loans give businesses a way out from the vicious debt traps practiced by unorganised moneylenders. Now you can safeguard your bottom-line more easily with MSME loan funds without having to worry about long-drawn loan approval processes from banks.

Dynamic ticket size

An unsecured business loan is not given against a collateral, therefore its value is not tied to the value of a fixed asset. You can get an unsecured loan starting from Rs. 1 lakh and go all the way up to Rs. 1 Crore to fit your business requirements.

Flexible Repayment

Small business loans from FinTech lenders comes with another plus i.e. the option to pay EMIs on fortnightly or monthly basis as per the loan agreements. So, not only can you get the loan funds quickly but you can also repay them faster to get another loan approved. For example, Lendingkart approves and disburses the paid-up loan amount without further processing charges or additional document requirements.

Multi-purpose usage

An unsecured business loan is a short-term business loan, thus, lenders do not impose any restrictions on its usage. You can use the loan funds for any number of business activities which makes them excellent for boosting your working capital, business investment and marketing activities.

Now, after reading the benefits, the question you must be asking is that;

What if you default on an unsecured business loan?

Well, defaulting on the loan can ruin your credit score for starters. And, you might not get loan future loan approvals due to the bad credit history. Which in turn will make the loan repayment even more difficult. The lender may also file a lawsuit if all negotiations for repayment fail.

However, in most cases the lenders will consider a revised repayment plan if you let them know of your financial difficulties in advance.

Wondering where to apply for a business loan online? Click here to visit us at Lendingkart and start your first online business loan application.

Working Capital Management for Small Business Owners

Working Capital Management for Small Business Owners

Any business can have different sources of income and efficient management of the same can work wonders in the running of the business. While startup capital and fixed assets are typically long term, for the day-to-day running of any business, an efficient cash flow structure is necessary. In the light of the same, working capital becomes quite crucial for small business owners.

What is Working Capital Management all about

Working capital management is the relationship between a company’s short term assets and short term liabilities. In simpler terms, it is the way in which a company handles its income generation and expenses. For example, if your company deals in a lot of paperwork and you need prints of documents every second hour, that is an active expense happening almost every day. Getting an office printer would make the expenses considerably less, over the course of time.

Efficient working capital management ensures that any company can run smoothly while being able to repay maturing short-term debt and expenses that might rise in the near future. In working capital management, the most basic tasks revolve around managing inventories, accounts receivable and payable and cash. Inventories in our example can be ink cartridges, blank paper that can be used in the future. While your sales on credit can be a part of accounts receivable, if the printer was bought through a loan, the EMI would be part of the accounts payable. Cash is pretty self-explanatory and is basically used for expenses that can’t happen on credit or are quite diminutive.

Importance of Working Capital Management

Efficient working capital management is an important component of sustainable growth. If a company runs out of money for running its day-to-day expenses, the production of wares and services will eventually stop. In such instance, the business will fail to cater to its existing customers and henceforth fail to acquire new ones as well. To restart production, the company will then tap into the company capital. While this step may offer a temporary respite, it will affect long-term stability by jeopardising asset and equipment acquisition and manintenance. Therefore, it is important to have a working capital management system in place, which can realisitically assess the company’s working capital requirements, hence giving the managers and business owners, enough time to come up with a solution. Working capital management also helps businesses in streamline processes, cutting down sundry expenses and reduce the cases of theft and fraud.

Ways in which Working Capital is used

The importance of cash for companies can never be expressed in enough words. Cash in hand is majorly used for three purposes, namely – Speculation, Precaution and Transaction. All the three are quite pivotal in deciding the growth of a small business.

Speculation

Speculation is the scenario where having appropriate cash in hand can aid in taking benefits of special opportunities related to purchase. Suppose a small business is dealing in fireworks. They would normally have stock left from the past year Diwali in their inventory. Let’s presume the business is paying a monthly fee of INR 20000 for storing its stock in a warehouse. The annual fees come to INR 2.4 lakhs. During September, the business gets an offer to receive an amount of new stock (equal to the old stock) at a seasonal discounted price of INR 1.8 lakhs. Here, the cost of the new inventory is less than the carrying costs of the old stock. But it is actually more profitable for the business since the old stock has a depleted value now along with the carrying cost of 2.4 lakhs. The business will do much better if it purchases the new stock at a discount and disposes the old inventory at a discount to small retailers. That way, the business will be ready for the festive months ahead with a new stock that has a much higher chance of being sold out fast.

Precaution

Precaution is when a business holds cash in hand to safeguard against unforeseen situations. Let’s consider our old example of the small business selling fireworks. Speculating on a booming sale in the festive months ahead, the business had bought in new stock on credit, hoping to settle the dues after the sales are done. But due to some state-wide problems, people didn’t celebrate as much and thus, didn’t buy much fireworks. But the business still has to honor its promise of repaying the dues, so it uses the cash in hand to do that.

Transaction

Transaction is perhaps the simplest of the reasons why small businesses should have access to cash in hand. Every small item needed in a day-to-day operation of a business can’t be settled through online transactions. Cash in hand is required for sundry purchases that are then added up at the month end for the expenses.

Working Capital Finance or Loan

These days, working capital requirements can be met with a working capital loan. The working capital finance industry offers short-term small-ticket loans for small and medium business owners to help them cope with the rigours of workong capital management. Working capital loans also allow business owners in streamlining their finances through flexible EMI schedules, instead of constantly worrying about invoice clearances and various due dates.

Non-banking financial institutions are leading the race when it comes to working capital loans and  financing.  There is a simple reason for this, NBFCs have developed products and services which cater exclusively to the needs of small businesses; meaning, it is easier than ever to apply for a business loan, the verification process is quick and hassle-free, and the loans are approved faster. NBFCs like Lendingkart Finance promise credit of funds within 3 days of loan application submission and verification, and that’s what a small business, struggling with working capital management, needs.

Tips to Improve upon Aspects of Working Capital

Accounts receivables, cash in hand, inventories, marketable securities and prepayments are current assets that will become cash within 12 months and likewise, account payables, wages to be paid and unearned revenues are current liabilities that need to be settled within 12 months of time. Good working capital management involves keeping the current assets consistently higher than the current liabilities to avoid financial complications or operational problems. Here are some small tips that can help you manage your working capital in your company more effectively. Keeping an eye on these can allow your small business to prosper –

1. Take advantage of float – Float or floating capital is basically the difference between book balance and bank balance. Let’s suppose you have dues of INR 3 lakhs to settle by the 31st of October. However, only INR 1 lakh is supposed to be paid by the 5th of October. Considering that you have INR 3 lakhs cash in hand by September 27, you could use INR 2 lakhs as a short-term deposit if you have no other assured profitable short-term business venture that can pay within a month. The return could be less than INR 1000, but it’s better than nothing. If you like investments, you can check the market and invest in equities for a short term for getting better returns, but this is a riskier approach

2. JIT Inventory – Just-In-Time inventory allows a business to cut down on costs involved in storing stock. Materials are purchased and received in time for the production line or for sales. Though this is quite difficult to achieve, if your relationship with the supplier is good, you can manage this effectively

3. Sales on Credit – Here, your sales play a crucial role. The goal is to shorten the amount of time your customers can take to pay their bills. You could offer a period of 30 days till their bill is due and offer a promotion of 3% discount if the same bill is cleared in maybe, 10 days or less. This allows you to sell more in a short time and pushes your customers to pay earlier to get a discount of 3%

4. Alternative Funding – This method can include availing working capital from banks, NBFCs, asset-based lenders, crowdfunding. In most cases, a genuine business idea, long term efficiency and good revenue generation can get you access to alternative funding rather quickly

5. Timely payments to suppliers – This is the easiest and simplest rule to follow. It goes without saying that if you pay your suppliers their dues on time, you can negotiate better deals and get discounts on your purchases

6. Group Purchase – As a small business, you might not always have access to funds to buy stock at a discounted quantity, or you might not have the available storage to accommodate a bulk of material that you get at a discount. It is always a good idea to look for other small businesses in the state or region who do the same trade as you and pool in resources to get the stock from your supplier. That way, you don’t have to spend a lot and still get to avail the discount

7. Learn the benefits of e-procurement – If you are into electronics, electrical equipment, garments, gift items and the like, you can look into sites like mytradebox.com where you could find interesting items with heavy discounts on bulk orders. These can help you source items quickly at very affordable rates

Working Capital Management and your Small Business

Small businesses aren’t much different from regular, established business giants. They just have a smaller market footprint. While larger businesses have to deal with multiple rules and regulations that they have set for themselves, as a small business owner, you will be much more flexible in making changes to the processes that are followed in your business. Taking working capital management seriously and handling the details through which your cash flows are dealt will definitely make your business a more profitable one. This, combined with social media, ecommerce and data science can work wonders for your small business. But those are topics that will have their own articles. Follow our Lendingkart blog to be regularly updated about the same.