Old May Not Always Be Gold

Like most college friends, Ankit, Murthy and Kumanan lost touch with each other soon after graduating. Unlike most friends who lose touch with each other, they ran into each other while vacationing in the same resort at the same time to celebrate new years’ eve. While their career paths had diverged 15 years out of college, they were soon reminiscing the good old days with an equally old bottle of scotch. After rewinding and replaying the past a few times, the conversation caught up with time and they started talking about work.

After several years of working in a traditional bank, Ankit got bored and joined a new age digital lending company as the head of credit. Kumanan worked at large garment manufacturing units in India, Bangladesh and China. Watching the industry disappear around him, he sensed opportunity and had recently started his own T-shirt design and manufacturing company where he was riding the e-commerce boom and sold most of his inventory online. He had ambitions of starting his own brand soon. Murthy had joined his father’s business and expanded a single department store into a chain across the entire city. He also supplied snacks, beverages, toiletries, cleaning equipment to the largest software company of his city and they were constantly demanding that he supply paper, ink and most other consumables as they grew and expanded.

With the scotch taking care of any and all inhibitions, Murthy and Kumanan’s frustrations surfaced and they started talking about how they love their work, the sense of independence, the sense of control over their destiny but how they absolutely hated dealing with lenders and banks. In their mind, Ankit personified this opaque, insensitive, slow lender and they wanted him to explain why all their past loan and credit card applications had been declined. The barrage of questions targeted at Ankit reached a point where Kumanan even wanted Ankit to explain why his voter ID had the wrong address! Ankit smiled and surprised them by saying he shared their frustration of being unable to provide the right loan to the right person at the right time in his old bank and that he also moved to a new age digital company with the intent to redefine lending in India.

Ankit then asked Kumanan and Murthy to explain how they went about getting a loan and got the answer he expected. Like most business owners, they did not have the time to deal with multiple banks and they used an agent to help them get loans. While they did not particularly like their agents, they did send a guy over to their office to fill forms, collect documents, organize bank discussions and get them their funding without them having to figure out every bank, product and process. In addition, Murthy and Kumanan both had multiple suppliers who they had worked out individual credit terms with. They also admitted that whenever they needed urgent money or large sums that banks would not provide, they got it from local moneylenders at exorbitant terms. It was quite beyond them as to why a bank would think they cannot repay a larger loan when they were clearly taking multiple loans and successfully paying them off.

Ankit explained that traditional banks and lenders had very limited scope for loan officers to think out of the box and act beyond established policies.  Banks did not have significantly different products or processes and ended up providing 2-3 year lump sum loans that were not large enough for Kumanan or Murthy.  They always ended up spending time allocating money across various activities such as expansion, payroll, supplier payments, seasonal demands, online vs offline sales where payment cycles were vastly different. The advantage of Ankit’s new age company was three fold: custom products designed to address specific financial needs of businesses, high speed customer experience with minimal documentation, and low pricing due to product features that enable non-conservative underwriting. Kumanan and Murthy’s curiosity was piqued and they wanted to know more.

Ankit asked Kumanan to imagine a world in which he downloaded a mobile app, added all his suppliers and had a line of credit with standard terms available that he could use to pay any supplier any time. He could pick his repayment period and the payment goes through immediately! No need to haggle with each supplier and the credit line grew with usage and regularity of payments. Since he sold online, he also had the option of picking a tailor made e-commerce loan where repayments were mapped to the payment cycle and a transparent cash flow control mechanism ensured that many more people qualified for affordable large loans. These loans even adjusted themselves for seasonality of his business and he could request top-ups as and when he needed them. Kumanan was very impressed that these products were not restricted to his imagination but were actual products that Ankit was able to provide via his new age digital lending company.

Murthy wanted to know if there was something for folks like him who did not sell online. Ankit told him that instead of taking long term loans that may not be utilized all the time but keep accruing interest, Murthy should opt for an invoice financing loan wherein all his supplies to the large software company could be funded as and when they make a purchase from him. That way, he does not have to plan for their expansion and is confident of the right amount of money at the right time and the right rate. Murthy agreed that while this product did sound interesting, he preferred if somebody came to his office to explain the product and handle the paperwork. Ankit mentioned that his company did not have any “paperwork” since most customer information was collected digitally but he is happy to send over a person to Murthy’s office to help guide him through the product and process. Murthy then wanted to know why he could not get a larger loan and Ankit explained that lenders and banks are happy to lend when they have some visibility into the cash flow of a business. As an example, Ankit’s company had recently launched a merchant cash advance product that collected daily payments directly from the credit card machines that Murthy had in all his stores. Typically, it was a lot easier to qualify for such a loan, there was minimal documentation and there was no need to think about payment due dates!

Having given up hope of ever hitting the gym, Kumanan and Murthy were happy with their new year resolution of trying out custom financial products from new age digital companies and keeping in mind that old may not always be gold!

Tushar Garimalla

Tushar has deep expertise in credit, risk management, portfolio management and analytics gained during his 10-year career with HSBC and Capital One in India and the US. Most recently, he worked on a small business credit card portfolio purchase for Capital One including business development valuations, due diligence, system integration and credit policy development. Tushar graduated from IIT Madras with a B.Tech in Electrical Engineering.

Tushar heads Decision Sciences at Capital Float. 

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Implication of GST on e-Commerce Sellers

The Goods and Services Tax (GST) is the single biggest reform in India’s indirect tax structure since the liberalisation of the economy in 1991. Through this reform, the government has integrated the previously disparate segments of the Indian economy and has truly begun the process of creating one market for the entire nation. The idea of a single tax on the supply of goods and services, from manufacturing to delivery to the final consumer, has eliminated the need for sellers to register with multiple tax platforms and file multiple tax returns.

GST is going to have a major impact on e-commerce in the country. Apart from consumers, this trade segment has two key players: the e-commerce marketplaces and the sellers. While e-commerce marketplaces such as Flipkart and Amazon are required to make necessary adjustments to their operations, it is the impact on e-commerce sellers, represented by the thousands of retailers that sell through the marketplace that requires intense scrutiny. Through this blog, we assess the impact of GST on e-commerce sellers and the steps such businesses need to take to ensure regular compliance.

GST-induced taxation changes for e-commerce sellers

Presently, GST appears to be an assortment of compliance guidelines. The enhanced regulatory requirements might take a seller’s focus away from operations for some time. However, GST as a single tax for products across India will be beneficial for all e-commerce sellers in the long run because of the aspect of transparency in trade brought forth by this new indirect tax reform. Let’s discuss the impact of GST on an online seller’s operations:

1. Increased reach of e-commerce sellers: GST has opened avenues for small and medium sized e-commerce sellers to compete with larger enterprises at a national level. Previously, these sellers were limited to operating within the confines of one state due to the looming tax rates of trading across multiple states. By unifying the taxation, e-sellers need not be burdened by multiple taxes while selling to consumers across various states.

2. Compulsory registration required: The government has specified a turnover threshold of Rs 20 lakh for registration under GST. This has been relaxed to Rs 10 lakh for north-eastern states. However, for e-commerce sellers, registration is mandatory, irrespective of whether they fall below the turnover slab of Rs 20 lakh or not. Removal of the threshold for registration will help bring more online businesses into the sphere of taxation.

3. Ineligible for Composition Scheme: E-commerce sellers are not eligible for the Composition Scheme either. The Composition Scheme permits businesses with a turnover of under Rs 75 lakh to file quarterly returns instead of monthly and pay tax at a low rate of 2%. Although this might seem to be a disadvantage for e-commerce sellers, the number of documents required to file for the Composition Scheme is relatively higher, reducing the burden of document collation on the seller.

4. Tax collected at source (TCS): E-commerce marketplaces are required to deduct 2% TCS on the net value of sales as the GST liability of the seller and deposit it with the government. Further, the sales reported by both the e-commerce marketplace as well as the seller need to tally at the end of each month. Discrepancies, if any, will be added to the turnover of the seller and they will be liable to pay GST on the additional amount. This measure will weed out fraudulent sellers and shall subsequently build trust between marketplaces and sellers.

5. Filing of tax returns: The e-commerce sellers need to follow the same process that is followed by brick-and-mortar retailers. Form GSTR-1, containing details of outward supplies, needs to be submitted by the 10th of every month. The seller will receive Form GSTR-2A by the 11th of the same month, which contains details of the tax collected by the e-commerce marketplace. They then need to review and submit Form GSTR-2 by the 15th of the month. Discrepancies in supplies are to be submitted through Form GST ITC-1 by the 21st of the same month. This would require businesses to be particular about tallying data coming from different sources before filing returns. Taking the help of a professional GST services provider in meeting compliance has become a requisite in light of these regulations.

6. Increase in Credit: The GST law has established ‘input tax credit’ to cover goods or services used by a company in the course of business. E-commerce sellers need to establish a direct relationship between the input material and the final product/service is eliminated. Much like other registered entities under GST, e-commerce sellers too can now avail input credit.

7. Refunds under cash on delivery: Consumers extensively opt for ‘cash on delivery’ in India and such sales witness return of orders to the tune of 18%. The reconciliation process for refunds takes around 7-10 days. Initially, there might be confusion around generating refunds for cancelled orders where taxes have already been filed.

The impact of GST on logistics and warehousing

With the Government having done away with multiple layers of tax, GST is bound to reduce costs incurred in e-commerce logistics. This reduction, according to some estimates, could be as high as 20%. Also, with state-level taxes being subsumed under GST, e-commerce platforms can reduce warehousing costs as they need not maintain huge warehouses across multiple locations in India. Such warehouses were earlier operating below their rated capacities, adding to inefficiencies and the selling price of products. Now, e-commerce marketplaces can opt for maintaining a few warehouses at strategic locations. These well-maintained logistics hubs will be able to attract FDI inflows and lead to an increase in overall efficiency in operations. With the free movement of goods and services and a uniform tax rate across states, e-commerce sellers will be free to transport across different locations in India.

The implementation of GST stands to benefit e-commerce sellers, as due to the elimination of entry taxes and faster movement of goods vehicles across states, the last mile delivery costs will come down. This benefit can be passed on to customers. Also, e-commerce marketplaces are now free to source goods from SMEs across India and not just limit themselves to local players across states. They were compelled to do this earlier to save costs on heavy inter-state taxation. Such a move will give impetus to the SME sector in India and foster healthy competition among SMEs, thereby improving the quality of products and services available in India.

Conclusion

There is no doubt that e-commerce will be subject to increased tax compliance and subsequently increased costs. However, in the long run, GST should level the playing field for e-commerce sellers, thereby streamlining their operations and setting the tone for increased business growth

Visit our blog to read more engaging content on GST.

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Oct 24, 2018

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5 Practices Business Owners Can Adopt at the Beginning of a Financial Year

The start of a brand new financial year is filled with several emotions for SME owners, ranging from relief after the intense pressure of March, anticipations and excitement for the year ahead. Amidst these, business owners often don’t find the opportunity to celebrate the year that has gone by and the new financial year up ahead.

The new financial year is the only occasion that is of sole significance to an SME, whereas every other event, festival or celebration involves friends and family. It is that time when the SME can celebrate with their team the previous fiscal year that was full of learnings, experiences, peaks and troughs. The beginning of a financial year also presents a unique prospect to start over; SMEs can renew their enthusiasm and vigor as they make new business decisions.

Indeed, celebrating the new financial year can become an ongoing ritual for SMEs as it also helps establish a stronger workforce with a refined drive towards the company’s vision. To gain an advantageous start, here are some practices to ease you into the new fiscal year, so that you can look forward to bigger success celebrations at the end of it.

1. Set financial goals
Whether your financial goals are numerical or tangible, they should be defined in a manner that lets you evaluate if they can be achieved or not. These can be long-term, such as profitability, margins, sustained cash flows, etc. that may not be accomplished over the span of the financial year ahead or specific goals that are short-term.

For example, a retail store that has rented a space might learn that the building owner plans to sell the building eventually, and intends to acquire the space for further expansion. For a smooth sale without depleting the working capital, the retailer should have a clear sense of the cost of down payment, mortgage and additional costs. Based on this, they can create a strict budget for the year and stick to it. Another option is to avail collateral-free finance options such as Term Finance or Merchant Cash Advance that offers flexible modes for repayment.

2. Evaluate the scope of debts
The beginning of the year is the best time to assess the debts that you might have accumulated over the past years. Start by weighing each of your existing loans based on its cost, interest rate and other subsidiary factors such as prepayment penalty. Always ensure that the loan with the highest ticket size is repaid first.

Business finance is not often a liability-encountering measure, but also an instrument for growth, expansion and diversification of your business. If you have a promising business opportunity at hand and are reluctant to accept it due to a shortage of funds, this is when you should consider availing business finance. To determine the customized credit solution that best suits your business, check out Our Products.

3. Improve book-keeping
Unorganized compilation of financial records is the most recurrent theme for SMEs who let go of trickling financial losses, only to discover a gaping hole in its wake. Unexpected, unrecorded cash expenses often eat their way into the profitability of a business, resulting in a long-lasting impact that might take several years to recover from.

It is integral to maintain records of operational and financial performance, and the method you adopt to maintain these play a major role in determining the accuracy of the data. If you have been managing business accounts on your own, it is advised that you hire an experienced tax accountant or opt for an enhanced accounting software this fiscal year. This will keep you free to focus on other tasks, with the assurance that you one step closer to higher profits.

4. Plan for new partnerships
Large corporations can perform the role of different stakeholders to an SME; they can assume roles as business partners, product distributors or customers. Contrary to conventional belief, small businesses have much to gain by associating with bigger businesses that operate differently from the way the SMEs function. This ensures that the partnership remains fruitful for both the entities involved, and avoids situations where they find themselves competing with each other If you feel that your enterprise will benefit from such a collaboration to supplement time, logistical organization and resources, this new financial year is when you can make that move.

5. Identify a new customer base
For any SME, extending the outreach of your brand to a wide demography of consumers is instrumental to evolve into a larger organisation. If you envision a steady rate of growth, what best time to target a brand new audience than the start of the financial year? You can also think of ways to improvise your product or service for a high-potential customer segment that is less exposed to competition. At the end of the day, this is an exercise that promotes out-of-the-box thinking.

A sound financial budget prepared with the above points in mind ensures that you are better prepared to face the new fiscal year. Also, it gives you an edge over your competitors on several fronts, and getting a business finance partner for your needs becomes much simpler when you are armed with a well-calculated plan.

Capital Float exists to serve the unique business aspirations of ambitious SMEs like you. With a growing base of 80,000 customers in over 300 cities across India, we provide customized credit solutions for the diverse needs that you might have. Paperless loan application, minimal documentation requirement and quick processing ensure that you receive funds when you need it. Choose from our new, innovative financial solutions for FY 18-19 and get ready to #BreakLimits!

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