What is Working Capital?
Working capital is the difference between the total number of assets and the total number of liabilities in a company. This amount is spent on executing day-to-day operations in a business. As a result, it is used as an index to measure the health of a company. Enterprises with high working capital are often strong businesses.
What are the Uses of Working Capital?
In most situations, working capital is used to run operations. A well-managed business will also use it’s working capital to achieve growth. For instance, an online seller would spend to add a new type of product to his portfolio. A retailer may liquidate funds to increase his store size by adding a new section to his outlet.
Other uses of working capital include:
• Equipment and inventory purchases
• Hiring, salary payments and employee training
• Unforeseen expenses
What are the Outcomes of Low Working Capital?
Responsible financial management may help companies secure higher levels of working capital. On the contrary, poor management of capital could result in the following issues:
• Bankruptcy risk: In the case of negative working capital, SMEs use money received from creditors to finance business operations. Businesses run the risk of bankruptcy due to the lack of sufficient income to counterbalance the expenditure.
• Lack of investment opportunities: Investors are less likely to consider companies which regularly have low or negative working capital. This demonstrates that the company is not being run effectively.
• Missed growth opportunities: With large amounts of positive working capital, businesses will have money to spend on pursuing growth. With negative or low working capital, businesses may find it difficult to capitalize on investment opportunities. Low working capital could have stifling effects on the ambitions of any businessman.
• Trade discounts: Many suppliers will offer substantial discounts if they are paid on time. Low or negative working capital can make it difficult to meet payment obligations which, effectively, increases the cost of inventory.
What are the Ways of Accessing Working Capital Finance with Capital Float?
At Capital Float, we offer a wide range of financing options for small and medium scale businesses. By providing quick and easier access to funds and with flexible repayment options, we can give businesses the right financial support to help them achieve their next milestone.
We offer Online Seller Finance to e-commerce sellers who operate on online marketplaces. Through a simple online process, the seller can apply for a loan and receive funds in three days. The loan tenure ranges between 90-180 days and is repaid on a biweekly basis. This loan is ideal for sellers who are looking at expanding into other marketplaces, increasing their product portfolio or purchasing higher volumes of stock.
Term Finance is applicable for traditional businesses that have been operating for three years. The loan tenure varies between six months to three years. Small scale manufacturers, retailers and distributors can use this loan to meet short-term investment requirements and finance inventory purchases.
Invoice Finance helps SMEs convert their invoices into cash, that can be channeled into financing business operations. This loan product has an exclusive feature of one-time bullet repayment mode, which might suit the cash-flow needs of several SMEs.
We also provide Merchant Cash Advance which will interest vendors using point-of-sale machines with consistent card settlements. Merchants can receive working capital finance of up to 150% of their monthly card swipes within three days of the loan application.
Our unique product called ‘Pay Later’ is a rolling credit facility, that enables the borrower to make multiple drawdowns within a predefined credit limit. The borrower pays interest on the utilized amount and not on the entire limit. By repaying the amount utilized, the borrower resets the credit limit, thereby instantly availing the facility in whole. Click here to read more about ‘Pay Later’. You could read about the product features by clicking here.
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In the past ten years, India has seen a growth in the number of start-ups coming forward to offer customised solutions in the fields of education, hospitality, travel, transport, healthcare, entertainment, marketing, e-commerce, waste management and consulting. Most of them, however, start with modest funds. They also deal with the challenges of validating their R&D, finding profitable markets and managing office administration costs and overheads.
It is also a common for small and medium enterprises (SMEs) in the service segment to experience their initial expenses being higher than their revenue.
Another problem encountered frequently is that while a business may be prompt at paying the bills raised by its suppliers and utility companies, it may not have customers who pay on time. Even though Accounts Receivable is an asset for any organisation, it gets converted into cash only at a later date. How then should such a business fund its current expenses and keep fuelling its operations? The answer lies in an SME loan, which is the best resort at this point.
Taking an SME or MSME loan is also a wise decision for an enterprise that has planned its next step towards growth or wants to invest some funds immediately in utilising a new business opportunity.
What kinds of loans are available in the market?
The service industry has numerous sub-domains, and a business loan for service company are provided by banks and non-banking finance companies (NBFCs).
The potent ability of digital NBFCs to offer unsecured business loans have made them a competitive source of finance for micro, small and medium enterprises. With a lending model facilitated by digital technology, these companies are also known as FinTechs, and they offer bespoke credit products for organisations providing professional solutions.
Your business loan for service company could be a working capital loan, invoice finance, credit for expanding the business or any other tailored loan for professional services.
A Working capital loan is usually taken to fund the daily operations and cover expenses such as wages, purchase of equipment or to manage entries on accounts payable. These are short-term loans that help businesses to stay focused on their growth.
Similar to a merchant cash advance, invoice finance is another popular SME loan where the lender advances money against the unpaid account receivables of the borrowing business. If you have raised bills to some of your clients, and they are yet to be paid, you can use the same to get a loan from a FinTech company.
Loans can also be used for business expansion and opening new branch offices or shops. Doctors who wish to start more prominent clinics, retailers who want to add more shelves in their shop or to purchase the adjoining premises to expand, and other entities that seek a business loan for service company growth can approach a FinTech lender for quick funds.
Can these NBFCs provide adequate amounts to suit your requirements?
A loan application requires you to state the purpose of the funds. It is good to have a precise idea of the amount to fulfil such business needs, and for this, you should check the exact market costs of the assets that you plan to buy with the borrowed amount.
As an example, if you are taking a working capital loan to buy motorcycles to facilitate the courier delivery services offered by your company, find the price of these vehicles and enter the same amount in your loan application. While there are no rules against requesting a more substantial sum, it is good not to go overboard. This prudence will help you in avoiding higher EMIs.
The amount that you can get on business loan for service company may range from a few lakh rupees to almost a crore. With such a broad scope for funds, the requirements of most SMEs are conveniently met.
How to apply for a business loan: The Process in General
To avail credit from conventional sources, you generally have to visit the lender’s office at least once and discuss the complete procedure. You may be asked to submit multiple photocopies of ID proofs and business financial health documents.
An MSME loan from the digitally operating FinTech company, however, is availed on much easier terms.
While the eligibility criterion differs from loan to loan, it is accommodating enough to include a high number of businesses. FinTechs only need to be sure of the repaying abilities of their borrowers, for which they ask for at least one year of successful operational history.
Owners of any Pvt Ltd, Prop, or LLP (limited liability partnership) company can check their eligibility and apply for their business loan online. They merely need to visit the website of the FinTech lender and fill in the application digitally. Remember that the portal of a genuine lender will be encrypted with a valid security certificate, and the URL will start with an ‘https’ prefix.
Since it is a digitized process, the upload of soft copies of documents is enough to verify the authenticity and eligibility of business for the funds. Among other things, the latest copy of tax returns may also be required.
It does not take long to know the status of your application. You will learn of the lender’s decision in minutes, and for every approved loan application, the amount is disbursed in 2-3 working days. It is deposited directly in the business bank account.
Loan costs and repayment
FinTech loans are offered without hidden overhead charges such as legal fee, loan insurance premium, documentation charge, commitment fee and other miscellaneous dues.
This implies that you only pay interest and a nominal loan processing fee along with the principal in your EMIs. Additionally, the terms of repayment are flexible, and instalments can be varied as per your business earnings.
While availing of a loan to solving cash crunch, SMEs can finance their business strategies without hypothecating any valuable asset to a lender.
Capital Float has adopted a digitally refined lending framework to enable the growing number of SMEs in India to easily procure the funds they need for their ambitious plans. As an online platform offering funds for various business requirements, we have trimmed the formal loan issuing process to make it stress-free and quick for businesses.
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To get more information on loans for specific business types, please visit our website or call us at 1860 419 0999.
Oct 24, 2018
The growing entrepreneurship and start-up culture in India has increased the demand for flexible business loans to support such new ventures monetarily. However, funds that come through banks, government agencies and other financial institutions are not always easy to procure. The detailed paperwork, the long waiting times to get approval for the required amounts, and the high interest rates to be paid over an extended period deter many new businesses from approaching the conventional sources of working capital.
Propelled by technological developments, an alternative source of loans for small business has emerged in the form of new FinTech (financial technology) lending. In India, the FinTech market has witnessed a period of rapid growth in the last two years. As per reports by KPMG India and NASSCOM, it is expected to cross the $2.4 billion mark by 2020. Its lending model is driven by digital technology and is inherently different from the conventional approach that has been used by banks for years.
Most FinTech lenders specialise in micro financing and SME lending. The loan is granted promptly based on financial statements, bank transaction history and e-commerce transaction behaviour where applicable. As a leading player in the digital lending industry, Capital Float has already carved out its niche and is trusted by entrepreneurs who need quick loans to materialise the innovations in their business plans.
Why are SMEs shifting from conventional sources of finance to FinTech lenders?
Credit underwriting has been a major challenge with regards to the SME sector. The loan officers in Indian banks still use outdated methods to determine the creditworthiness of a small business. Furthermore, the loans offered by banks are secured in nature, those that require the borrower to offer some collateral – such as real estate, gold, investment portfolio, machinery or stocks – as security. This prevents several enterprising ventures from availing finance even if they have good prospects to grow and the ability to pay back their small business loan on time.
A digital SME loan is comparatively easier to obtain. The FinTech lending structure is backed by the assessment of digitally uploaded documents. The creditworthiness is evaluated using big data, psychometric questionnaires and social media behaviour, in addition to the trading position of the concerned business. If the SME does not maintain a formal balance sheet, alternate documents throwing light on its prospects in the industry can be used to determine the creditworthiness.
The experience of procuring loans before the advent of FinTech revolution was not very customer-friendly. Borrowers had to fill in long paper-based forms, gather many documents in support of their applications and pledge an asset to the lender. Subsequently, there was a waiting period running into weeks before the small business loan amount was approved.
Digital lending companies have improved the user experience by leveraging technology to tone down the paper work and processing time. Just like retail shopping and online travel bookings, the capital market for SMEs also needed to evolve and move online.
Was there a need for this new source of small business loans?
The emergence of FinTech sector for lending to small and micro enterprises is not only limited to India, but is a global phenomenon. An article published by Forbes has comprehensively analysed the case for this new source of business loans. The financial crisis of 2008 had left the banking sector with almost no scope for innovation. They were heavily regulated by new rules for lending and were urged to limit their risk by demanding for liquid collateral and Tier 1 capital. They also had to be more attentive than before to their back offices and compliance management.
Such changes encouraged finance-savvy and customer-focused talent pools to devise new ways, whereby technology could be leveraged to make borrowing easier. Digital lending services build a bridge between lenders and borrowers. There is a difference in the time taken to process the application, the underwriting process, the actual disbursal of the amount and the period for which the SME loan is granted. While adequate care is taken in evaluating the eligibility of a business for the grant, a FinTech company also ensures that there are no superfluous delays.
In line with the standards established by banks, an online lender must also ensure a high degree of transparency in the process of granting loans. At Capital Float, before a transaction becomes active, borrowers receive complete information on the rate of interest, the tenure of loan and any condition attached to the deal. There are no unpleasant surprises at the time of loan repayment.
Another advantage of procuring unsecured loans from a digital lender is that this new industry can adjust to changes more actively than conventional banks. With lower costs of underwriting using technology, lower rates of interest also become feasible.
Digital lending is helping a new class of business borrowers who have not been able to obtain funding from traditional sources. With an automated underwriting process and risk management, it has a lower operational cost and smoother loan processing. A major of FinTech-based lending is the assessment of client’s credit worthiness. Unlike banks that use only income statements and formal credit history, a FinTech company gathers substantial data through social media and big data. What’s more, with a strong use of technology in lending, the focus on safety is also uncompromising. There are adequate measures to keep the customer details encrypted and secure. Moreover, they also facilitate tailored finance products keeping in mind the varying needs of different industry segments.
The underlying objective is to support promising entrepreneurs in getting quick funds and realise their new business ideas. Capital Float believes that SMEs can grow consistently if they have secure and quick access to funds. As the government continues to promote digital transactions through e-wallets, mobile-driven point of sale (POS) and Internet banking, the financial structure must also be modernised to give a further impetus to entrepreneurship and the ‘Make in India’ vision.
As a FinTech company, Capital Float has created a business model that is not limited by structural formalities surrounding banks and traditional lending agencies. Our aim is to serve client needs efficiently and help promising businesses flourish progressively.
Oct 24, 2018
With a dream to revolutionize business lending in India, Capital Float provides loans to small businesses – YourStory
Written by Pardeep Goyal
The Indian business environment is exciting especially now, where every bright idea is turning into a business, big or small. There are over 30 million SMEs in India. Small businesses are run by passionate entrepreneurs, but unlike digital startups, venture capital money is not accessible to them. Despite efforts, some of these businesses are losing out on growth or shut shop due to lack of working capital.
With a dream to revolutionise business lending in India, Gaurav Hinduja and Shashank Rishyasringa are changing the business of money lending with Capital Float.
Initially, Shashank was an engagement manager at McKinsey & Company, where he advised several leading financial institutions, investment funds, governments and foundations on business strategy, governance, operations and risk management. Co-founder Gaurav was running operations at India’s big apparel manufacturer Gokaldas Exports with over 40,000 people and USD 250 million in revenues.
The duo were at Stanford together before they co-founded Capital Float. They considered various business ideas but doing something related to capital was a natural inclination for them. So they decided to take on the money lending problem for small businesses.
How Capital Float works?
According to Gaurav, Capital Float works in three basic steps:
- Customer has to apply online,
- Submit documents,
- He/she gets a loan if eligible in about three days.
Yes, just three days for loan!
He adds, “We make sure to go through as many data points as available, including external data sources to determine credit worthiness. Once we have established that, we have been able to disburse a loan in under three days and in a lot of cases where the loan is small, it happens instantaneously. In the future, we hope to reduce that time for disbursal even further.”
Team Capital Float understands the importance of friendly capital, and is quick to deliver that much-needed finance to promising businesses that approach them. It is rare in India that a small business can get a loan in such a short time from any traditional finance company. Gaurav says, “Besides the swiftness and hassle-free nature of our service, one of the key USP is that we do not charge a prepayment penalty and our products have dynamic tenures that suit our customer’s needs.”
Key Challenges and Motivation
Starting up always comes with its set of challenges. At Capital Float, they went through the motions like everyone else: from the initial days of hiring the right team to defining clear goals, to ensuring compliance.
For startups, challenges are part of the larger scheme of things to survive and grow. Capital Float is an RBI-certified NBFC but registration was not an easy task. “At one point, we almost quit and took a break for a couple of months. But we understood regulation is very important in a complex market like India and we got back on track and persisted with our goals”, says Gaurav.
Gaurav shares how the company started conversations with their customers in the early days: “Most traditional loan providers find reasons to say ‘no’ to an entrepreneur looking for capital, but we look for a reason to say yes.”
The company has come a long way now; it is serving in major cities like Delhi, Mumbai, Bengaluru and Chennai and has testimonials from CFO of Zovi and other big brands.
According to Gaurav, today’s SMEs will drive tomorrow’s billion dreams. “But we need to ask ourselves who the driving and supporting force behind such SMEs are today,” he adds. The dream to revolutionise business lending in the country has kept Gaurav and Shashank going. “The fact that we get close to a hundred applications a day vindicates our belief in what we set out to do: create a capital revolution in India,” says Gaurav.
Being an entrepreneur himself in the fin-tech domain, Gaurav believes that entrepreneurs form the backbone of the Indian economy as the creators of the largest number of jobs and biggest contributors to the GDP. A significant hurdle for most of them is timely access to appropriate finance.
He shares some advice for entrepreneurs working in the financial domain and other budding startups:
- Compliance is key; never ignore it
- You should choose investors who share your vision
- Don’t give up easily; starting up can initially wear you out but it should not bring you down
- Don’t always hire for skills. Sometimes it’s important to hire for values
- Don’t make promises to the customer that you cannot deliver on
- Don’t launch your product in too many markets at once. Have a soft launch first, test it, tweak it and then re-launch the revised product
Gaurav adds, “There are many banks and NBFCs which provide loans to businesses, but you need to become a partner to your customer, not a lender. Use technology and big data to improve your customer’s experience. Understand how different customers use your products in different markets so that you can customise your product to meet their needs.”
Piece sourced from YourStory. You can read the full piece here.
Oct 24, 2018