Everybody thought we were nuts – TOI

Written by Shilpa Phadnis. 

When Stanford MBA graduates Sashank Rishyasringa and Gaurav Hinduja started online lending startup Capital Float, it was counter-consensus. All around them they had naysayers, including investors who they had approached early on.

“You guys must be nuts -lending is not a business for you.” “It’s an offline business. You guys have to set up branches.” “Why don’t you guys start an e-commerce or a big data company.” These were some of the comments, recalls Sashank. About the only ones who believed in their idea were their parents.

The two worked with Baba Shiv, professor of marketing at the Stanford Graduate School of Business, to shape their idea of democratizing access to capital. “We wanted small and medium businesses to have access to credit on collateral-free terms.People needed loans against their business health and not against personal property,” Sashank says.

Capital Float started in 2013 and is the trade name of Zen Lefin, a non-banking finance company (NBFC) registered with the RBI.

Sashank, who was passionate about policy and development, was an engagement manager with McKinsey & Co in New York and India before he teamed up with Hinduja to start Capital Float. He graduated in economics from Princeton Uni versity and did an MBA from Stanford. Hinduja was the head of operations at Gokaldas Exports, overseeing one of the country’s largest apparel manufacturers.

 Banks, Sashank says, follow a cookie-cutter approach in assessing SMEs.Their lending policies are restrictive, collateral re quirements are inflexible and disbursements take up to 60 days. There are over 3 crore registered SMEs in the country and around Rs 7 lakh crore of loans have been disbursed through banks to them. But estimates show that the unmet demand is over Rs 9 lakh crore. “We wanted to use tech to bring agility to lending, become a lender as fast and flexible as a family member, but do it in a formal way ,” Sashank says.
Capital Float created flexible credit products that have helped SMEs get out of the clutches of informal sector financiers who charge high interest rates. One of the early customers was a mobile phone vendor from Bhilwara in Rajasthan. “He had pledged his house to get seed capital to start his business. He sold mobile phones on Snapdeal and had a great track record. From Rs 5 lakh a year back, he runs a Rs 50 lakh credit line with us today ,” Sashank says.
Capital Float has partnered with e-commerce marketplaces like Snapdeal, Flipkart, Amazon and Paytm to finance small merchants selling online. “We give an in-principle approval in 10-15 minutes after assessing the credit risk. Borrowers can apply online in minutes, select desired repayment terms and receive funds in their bank accounts in seven days with minimal hassle. We want to benchmark lending to the ecommerce experience,” Sashank says.
The company uses proprietary algorithms to check fraud and repayment history , and uses psychometrics to assess entrepreneurs’ payment ability . “We have taken the human bias out of financing and lowered the cost of lending,” Sashank says.

Now, with Rs 200 crore of loans disbursed, and $17 million raised from investors including SAIF Partners and Aspada, the early scepticism around their venture has more or less vanished.

News piece sourced from the Times of India. Read the original article here

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Understanding Working Capital

Every small and medium sized enterprise requires a certain amount of working capital to ensure smooth business operations. Working capital is nothing but the equity or funds available to owners to meet their short-term financial commitments and expenditures. Calculated by subtracting the value of current liabilities from the current assets of a business, the available capital stands testimony to the financial health and efficiency of an enterprise, particularly in the short-term perspective.

There are various types of working capital such as fixed working capital, temporary working capital, gross and net working capital, etc. to name a few. Since it is the fundamental building block for any enterprise, working capital is a basic requirement that can never be compromised upon. This is why Working Capital Loans are regular finance products offered by any banking entity, and is the most demanded of loans by small, medium and large enterprises.

Benefits of Working Capital Loans

Working capital loans are short term financing options that are used to cover accounts payables, wages and investments on short term assets. SMEs whose business are reliant on seasonality or manufacturers who depend on traders can opt for these loans until their business picks up or they receive payments. Since working capital loans can be used as the SME deems fit and can be availed for shorter terms, they are extremely beneficial to resolve any immediate financial crunch. Moreover, since these loans are disbursed quickly with fewer documentation requirements, owners can be relatively stress-free regarding daily/monthly expenses of wages, purchases, infrastructure bills, etc. till they can keep their businesses afloat.

Types of Working Capital Loans

Though all businesses are eligible to get working capital loans, finance providers will require business owners to meet certain prerequisites or conditions, depending on the scale of their operations. Traditionally, a security deposit or guarantee is required of them, and the working capital loan offered by lending institutions will significantly depend on the enterprise’s credit repayment history, among other things. However, several NBFCs now provide unsecured loans after an analysis of the business’ books. New-age lenders are now comfortable with extending collateral-free working capital loans to SMEs and even micro businesses.

Some of the most common working capital loans available for businesses are:

1. Short Term Loans
These loans are disbursed at a fixed rate of interest for a fixed payment period, which is usually up to 12 months.

2. Bank Overdraft and Loan Facility
The availability and terms of this type of loan are wholly dependent on an enterprise’s relationship with the lender. For this type of loans, the rates of interest are usually one or two percent above the prime interest rate levied by the lender.

3. Account Receivable Loans
Being the most popular of working capital loans, account receivable loans are most sought out by SMEs. This type of finance is the best choice for businesses requiring equity to meet expenditures such as fulfilling a sales contract, investing in an asset, etc.

Features of a Working Capital Loan

There are several banks and NBFCs in India licensed to offer working capital loans to businesses.  Smart SMEs would thoroughly research parameters like loan tenures, rates of interest, repayment terms, security requirements, etc. before opting for a lender, as this choice will have a lasting impact on the way you conduct business and on larger credit needs in the future.

Loan Eligibility – The number of years the business has been in operation, your CIBIL score and annual business turnover are some factors that will affect the loan eligibility, amount, tenure and rate of interest charged on your working capital loan.

Availing the Loan
– Below are some points that an SME should know before entering into discussions with an NBFC for working capital loans.

1. Most working capital loans are offered for a 12-month tenure.
2. Depending on the loan amount, the scale of business and the kind of lender, an interest rate of 12-16% per annum will be charged on the loan amount.
3. Traditionally, lenders would require collateral from SMEs in return for providing a loan. Even today, some lenders need a guarantee to know that the business they are investing capital into is up and running and if the loan amount will be returned.
4. However, several NBFCs now offer collateral-free loans to help SMEs manage their short-term expenditures without compromising on business goals. But the terms and conditions of the NBFC will dictate the type of loan an SME can avail.
5. Remember, bankers and lenders use the working capital ratio as a quick way to determine a company’s financial health.

Documents & Other Prerequisites – An SME needs to furnish certain documents to confirm the intent of repayment or as a measure of security as per the NBFC’s bylaws. Another prerequisite that business houses may require is to be registered under The Company Act 2013 of India as either of the following:

1. sole proprietorship
2. partnership
3. private limited firm
4. public limited firm

KYC documents, ITR financial statements, VAT returns, etc. are some documents that you will be required to show or upload while applying for a loan.

Choosing a Lender – Since the future of a business, its longevity and its ability to operate efficiently could rest on the working capital loan and the relationship with the lender, it is advisable to choose a reputable lender. Look for lenders who offer simple online documentation, customized business loans and quick disbursal before proceeding with one. It is always safe to choose a well-known lender with a modern outlook and flexible conditions to ensure a seamless experience.

It is clear that a company’s balance sheet indicates the amount of working capital available. This capital, equity or funds meet the necessary day-to-day expenses of every organization and are crucial to an enterprise’s success. Though big businesses are more likely to keep aside abundant working capital to meet their expenditures, startups and SMEs can avail working capital loans to ensure that there are no gaps in meeting expenditures to keep their enterprises running smoothly.

Capital Float is a reputable digital lender with a deep understanding of the unique requirements of a business. Our loan packages are designed to fulfil every short term expense that you will come across.

Oct 24, 2018

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How to Determine Your Working Capital Needs

The availability of working capital is probably the most critical aspect of running a business smoothly and successfully. Also known as the current capital, working capital basically refers to the cash available with an organization for managing its daily operations and is calculated by simply deducting the current liabilities of a business from its current assets.

Assets that can be easily converted into cash within a year or a business cycle are termed as current assets and include cash, accounts receivables, inventories and short-term prepaid expenses. Similarly, current liabilities are the ones that a business needs to pay off within a year or one business cycle and includes accounts payable, accrued liabilities, accrued income taxes and dividends payable.

If current assets are greater than current liabilities, the business has a positive working capital situation or extra cash to meet unexpected expenses. Conversely, if the current liabilities are more than the current assets, the business is said to have negative working capital and needs to take working capital business loans.

Adequate cash availability also allows a business to take care of newer opportunities that require quick infusion of funds. However, not all businesses have access to adequate funds to carry out their operations smoothly and often need working capital loans.

Working Capital: Need and Importance

Every business needs to maintain some working capital to continue its operations smoothly. The amount of liquid funds available with a business is a measure of its ability to meet its short-term obligations. It is also a reflection of a company’s operational efficiency. Here are some reasons why working capital is essential:

Smooth Running of Business: Funds are needed for the smooth working of day-to-day operations and spending on the purchase of raw materials, overhead expenses and payment of wages and salaries. Working capital enables an uninterrupted flow of production or provision of services.

Goodwill: Sufficient cash with a business means it is capable of making prompt and timely payments, which in turn enhances its goodwill.

Easy Loans: Banks and financial institutions prefer to lend to organizations with adequate working capital.

Ability to Deal with Unexpected Expenses: Adequate availability of funds prepares a business to meet any unexpected expenses or situations.

Working capital is often used to judge the financial health of a business. A positive working capital situation indicates that a business is capable of paying off all its short-term debts, operating expenses and salaries with some extra amount remaining for reinvestment. In contrast, negative working capital is a cause for concern. It hints that the business may not be able to pay off its creditors.

Need for Working Capital Finance

Many businesses do not have sufficient cash in hand or liquid assets like money in the current account to meet their daily operational expenses. This is where working capital finance comes to their rescue. Small retailers or merchants typically require capital to fund seasonal inventory buildup. Also, businesses that do not have stable revenues through the year may still need to maintain a specific amount of inventory to fulfill any sudden increase in demand for their products. Such units often require a working capital loan to pay wages or meet other expenses during lean periods or when they are servicing an order, and the receivables would become due only after order fulfilment.

A working capital business loan is a short-term finance option that is generally repaid in the period when sales are high and the company has surplus cash. A major benefit of such credit is that its terms is short, which allows a business to maintain full control of its operations. Such loans need to be sanctioned quickly, without a lengthy approval process. Working capital funding can be secured or unsecured, depending on the financial product or lender.

Determining Your Working Capital Needs

The proper assessment of working capital needs is an important part of efficient financial planning. It allows a business to plan well and arrange the necessary funds on time to ensure smooth functioning of daily operations. The amount of current or working capital required by a business may vary. It is dependent on the operating cycle, or the amount needed to pay suppliers, the amount of inventory held and the time taken to collect cash from customers. Also, this may change with changes in demand for its products and services.

The working capital requirements of a business can be calculated by subtracting the accounts payable from the sum of the inventories and accounts receivables. Businesses need to fill the working capital gap by using internally generated profits or external borrowings or a combination of the two.

In case of new units or startups, working capital refers to the amount of money to be borrowed to keep operations going until the business starts generating adequate revenues to cover its operational expenses. Calculating the amount required to carry on business in the initial few months when there are no or very little revenues challenging and often leads to businesses borrowing too much or too little. A business should look towards raising working capital loans that have a prepayment option, or the option to repay the loan before the term is over.

Raising Working Capital Business Loans

Financial institutions use two ratios – the current ratio and the quick ratio – to measure the financial health or liquidity of a business. The current ratio is obtained by dividing the value of current assets by the value of current liabilities. A ratio above one means the current assets are more than liabilities, which is viewed positively. The quick ratio measures the proportion of short term liquidity (current assets minus inventory) to the current liabilities of a business. It gives a good idea of the company’s ability to meet short-term expenses quickly.

Working capital business loans are granted after assessing a company’s liquidity and working capital needs.

Oct 24, 2018

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5 Common SME Financing Mistakes To Avoid

The SME (small and medium enterprises) sector is an important contributor to India’s economic growth. Even though their product or service may add great value for certain people, many SMEs face challenges. This is mostly because of the lack of research and planning by the business owners about the potential opportunities and risks of the particular niche in which these units operate. Many-a-times such businesses fail to make accurate assessments of their working capital requirements and, even when they do, cannot find ways to finance them.

Some common financing mistakes made by SMEs relate to whether or not to borrow, estimating the correct amount of SME business loan required, checking the full financing cost, the time wasted on getting a loan approved and the opportunity costs.

SME Financing Options and Some Common Mistakes

The Government and the private sector have taken several initiatives to increase availability of small business loans to SMEs in India. Despite the improved availability of SME finance, many units are still struggle with easy access to finance. This is mainly due to the lack of awareness of new-age, innovative financing solutions that are offered by FinTech lenders like Capital Float.

Here are the five most common financing mistakes made by SMEs:

1. Lack of Planning: One of the gravest shortcomings of smaller businesses is the inability to plan for the longer term. Business owners tend to get so involved with daily operations, troubleshooting and trying to complete orders that they fail to step back and look at the bigger picture. In the absence of a business plan, many SMEs do not foresee the amount of cash they would require to grow and expand. They suddenly find themselves in a severe cash crunch, unable to meet their working capital needs.

A sound business plan is essential for approaching a bank for a loan. Moreover, the ability to project a cash crunch or the funds needed to grow would allow SMEs to approach banks in time, since traditional lending institutions may take months before sanctioning the loan. This is where FinTech lenders have eased the situation. By deploying cutting-edge technology, Capital Float can ensure loan approval within hours. The use of powerful algorisms helps determine the prospects of a business, easing the process of loan approval. In fact, such lenders do not require a formal business plan for sanctioning SME finance.

2.Wrong Estimation of Funds Required: Most business owners feel anxious about overestimating their loan requirement and having to pay interest on excess funds. This makes them lean towards underestimating their costs. Thus, even when a loan is disbursed, these businesses are left wanting for more. Of course, the overestimation of the loan requirement hits the bottom-line.

What such businesses need is Capital Float’s Pay Later Finance product, which offers a Predetermined credit amount. While a credit amount is determined, based on the prospects of the business, the SME has the flexibility to transfer only as much funds, as it currently needs. Repayments can be made as the business generates money, and the repayment restores the credit amount, making funds available for future requirements.

3.Hidden Charges: Several lenders burden SMEs with hidden fees. These charges may be exorbitant and the business owner may not even know when they are levied. At Capital Float, perfect transparency is maintained, with no hidden charges. In fact, unlike most traditional banking institutions that impose a fee for the early repayment of a loan, there are no prepayment charges at Capital Float.

4.Choosing the Wrong SME Finance Product: Most SMEs turn toward unorganized moneylenders or traditional banking institutions to borrow money. These loans are not tailored to the specific needs of the SMEs. New-age lenders like Capital Float offer various SME business loans that have been designed keeping in mind the needs, business model and ability to repay of different businesses.

5.Trying to Arrange Collateral: SMEs sometimes put too much at stake to get a loan or do not borrow money in the absence of collateral. Capital Float offers small business loans in India without the requirement for collateral. One can also opt for a Merchant Cash Advance, which converts accounts receivables of a business to quick and usable funds.

Apart from these common mistakes made by small businesses, the timing of the loan approval and receipt of funds plays a critical role in the success of SMEs. Any delay in arranging the necessary funds can prove catastrophic for a business. This is mainly because SMEs often do not have sufficient negotiating power with their suppliers. They need to make payments for raw materials long before they can raise an invoice to their customers.

The rapid evolution of technology to address SME finance needs have revolutionized the lending space. The objective of FinTech lenders is to eliminate the liquidity issues faced by the SME sector by ensuring the quick approval and disbursal of the loan amount, while also making it easier for these smaller businesses to repay the loan. However, to make use of these advantages, SMEs need to be made aware of such options.

Oct 24, 2018