One of the most significant issues encountered by small enterprises is funding crisis or lack of sufficient working capital.
Working capital facilitates a business to function smoothly by meeting all its short-term expenses such as –
- purchasing raw materials, inventory, equipment,
- paying for overhead costs such as rent, salaries of employers, electricity bill,
- repaying loan EMI and any other emergency expenses.
Working capital is broadly classified into two:
- Networking capital.
- Gross working capital.
Networking capital is the difference between current assets and current liabilities. A positive net working capital indicates that the value of current assets is more than current liabilities. Whereas negative net working capital means current liabilities exceed current assets.
On the other hand, gross working capital is the sum-total of all the currents assets that can be converted to cash in the current financial year. These assets include items like short term investments, inventory, cash equivalents, account receivable, prepaid expenses, and the like. Net working capital is more useful for analyzing an enterprise’s ability to meet its short-term expenses.
Businesses may experience working capital shortages during the initial period when total expenditures incurred are more compared to profits earned. In addition to that, seasonal firms may also face a cash crunch during the months when business is slow. As a result, they cannot operate properly, and in some cases, suffer loss and stop its operations.
Nonetheless, there are several ways through which an individual can arrange for capital to avoid such scenarios.
Some of these include:
- Merchant funding:
This is one of the strategies that enterprises can adopt to arrange for working capital. Here, lending institutions work with credit/debit card point of sale transactions to advance collateral-free loan to small enterprises. They collect a fixed percentage of a business’s daily card transaction as repayment for the loan via the POS.
Merchant funding also enables borrowers to concentrate on running their businesses without worrying about monthly EMIs. Thus, it is an effective financing solution for small businesses that carry out card transactions.
- Invoice financing:
Financial institutions provide loans to enterprises against their unpaid invoices to meet all expenses during this period. There are two types of invoice financing – factoring and discounting.
In invoice discounting, lenders pay up to 90% of the invoice value to borrowers, and once they get paid by their customers, they can repay the whole amount.
Invoice factoring is when individuals sell their invoice to lending institutions who pay around 70-80% of the total invoice amount.
The lenders are then responsible to collect the full invoice amount. If they receive the full amount, they will then pay back some of that amount to the borrower.
This form of financing will enable small businesses to pay all their expenses, purchase raw materials, and continue operating without waiting for their clients to pay them back.
- Business loans:
Individuals can opt for business loans from NBFCs to meet their working capital requirements. These are collateral-free loans at affordable interest rates, which means borrowers do not have to mortgage their personal or business assets to avail of such loans.
Furthermore, one can opt for a business loan that meets their specific requirements. For instance, an entrepreneur going through a funding crisis can look for a working capital loan to meet his or her short-term expenses.
Other types of business loans include – SME and MSME loans, machinery loans, and business loans for women.
One can quickly get approved for a business loan as they have simple eligibility requirements which include:
- The applicant should be 25-55 years of age.
- They should have a business running for three years.
- Borrowers should maintain a healthy CIBIL score.
Borrowers also have to provide only a few documents like KYC documents (Aadhaar, PAN, Voter ID, etc.), proof of business existence, income tax returns, etc. to apply.
Additionally, lending institutions like Bajaj Finserv also provide pre-approved offers, which facilitate the hassle-free credit application process. Besides, business loans, these offers can be availed on credit cards, personal loans, and several other financial products.
Apart from the above funding solutions, you should also ensure that your business never runs out of working capital. It is because an adequate supply of working capital will not only enable an enterprise to carry on with its operations efficiently; it will also aid in expanding its operations.