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.
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SMEs are sometimes cash-crunched to provide credit to their customers. These customers often ask for 30-60-90 day credit after raising an invoice. Due to the absence of negotiating power, SMEs are often arm-twisted into accepting delays in payment. The gap in cash flows resulting from delayed receipts affects the performance of a company and its ability to run smoothly.
Such situations can now be easily avoided by using Supply Chain Finance, which allows a business to raise the necessary funds by using its receivables. Read on to know more about how supply chain financing can be a powerful tool for boosting the cash flows of your business.
When is Supply Chain Invoicing Needed?
Businesses offer a credit period to customers after executing an order and raising an invoice, since this helps them establish a stronger relationship with customers, build customer loyalty and receive recurring orders. While on one hand, SMEs need to deal with delayed payments from clients, they do not have the negotiating power to delay payments to their suppliers. Moreover, they need funds to make overhead payments and provide salaries to their employees. Even the most profitable SMEs may face cash crunches due to the time lag between having to incur expenses and actually receiving payments from clients.
If not fulfilled in time, this shortage of funds can weaken the smooth functioning of the business. This is where supply chain invoicing for small businesses comes to the rescue. The invoices are like an asset for a business, and can be used to overcome cash flow issues. Supply chain invoicing uses the accounts receivables of a business as a means to increase liquidity.
Invoice Factoring Versus Supply Chain Invoicing
There are two ways in which a business can use its invoices to infuse cash into its operations: invoice factoring and supply chain invoicing. With invoice factoring, a business sells its outstanding invoices, often at a significant discount, to a third party. Supply chain invoicing allows a business to use its outstanding invoices as collateral to secure a loan. Often businesses do not prefer invoice factoring since they do not like the idea of a third party contacting their clients to recover an invoice. This can have a bad impact on the relationship between an SME and its customers.
Supply Chain Invoicing for Small Business
If a small business has outstanding invoices, it can use these to inject cash into its operations. Capital Float’s Supply Chain Finance product does exactly that. The best news is that the benefits do not end there.
Fast Loans: For any business, especially an SME, timing of receiving funds is critical. Using cutting-edge technology, FinTech companies like Capital Float are able to meet the most urgent working capital needs of small businesses. In fact, the Supply Chain Finance product uses data-driven criteria to approve a loan within hours and disburse the sanctioned funds within just three days.
Convenient Application: One does not need to visit a financial institution and stand in any queues to apply for supply chain invoicing from a FinTech lender. One can apply online, at any time and from anywhere. With such options available, an SME can say goodbye to the hassles of obtaining a loan from a traditional bank. The application process for Supply Chain Finance is so smooth and easy that one can complete the application form even while traveling from home to the workplace. What’s more, Capital Float has a mobile app that makes the application process even easier. The complete process involves filling up a form and uploading the required documents, which takes less than ten minutes.
High Loan Amounts: An SME can receive as much as ₹1 crore to inject into its business. From as low as ₹1 lakh to as high as ₹1 crore can be secured to be used as working capital or to fund the growth of a business. An SME can borrow as much as 90% of the value of the outstanding invoices. One can use the supply chain finance calculator to get an idea of the amount the business can borrow.
Flexible Loan Tenure: With Supply Chain Finance, one can have a repayment plan between 30 – 180 days. The greatest feature is the one time bullet repayment option, which allows a business to repay the loan in one go, thus reducing the interest burden. Else, the business can repay the loan in easy monthly instalments.
Minimum Documentation: In order to Apply for Supply Chain Finance, a business would need digital copies of only a few documents. These include audited financials for the past couple of years, VAT returns and bank documents for the past six months, KYC documents of the business owner and the SME, invoices for the last three months and sales ledger for the last six months.
Do you raise invoices and then need to wait weeks or months for clients to pay? Did you know your cash requirements could be met with supply chain financing?
Now a business can secure the required financing without pledging any assets. The invoices are all that a business needs to infuse cash immediately into its operations. Revolutionary products like Capital Float’s Supply Chain Finance have helped solve the cash flow problems of many businesses. Moreover, being technology driven, there is complete transparency in the fees for this service. There are no hidden costs in acquiring this loan product.
Oct 24, 2018
Supply chain finance is an important but often underrated aspect of supply chain management. At its core, supply chain management is the management of the flow of material / services, data and money through a network of assets from the point of origin to the point of final consumption (and back). Natural disasters, geo-political crisis and financial crisis faced by the world over the past decade have forced companies to move away from only optimizing their supply chains to making them more resilient. For a supply chain to be truly resilient, all risks associated with the asset base managing the flow (i.e. the material & services, data and money) must be negotiated intelligently, keeping in mind that each one represents a point of failure or a point of opportunity.
Industries are habituated to ignore the significance of supply chain financing. While there has been a lot of collaboration between different constituents of supply chains, they usually center on inventory. However inventory and finance are intrinsically linked; increased players in the supply chain machinery is directly proportionate to the increased complexity in the financing of the process. This is especially true in a country like India, where the number of intermediaries, in many cases outnumbering the actual value addition points, poses a complex problem from the paradigm of supply chain finance and more importantly supply chain resiliency.
As with anything in a complex supply chain, the bulk of the power resides in a few constituents (maybe the retailer or the manufacturer depending upon the specifics of the value chain). These companies understandably look out for their own interests especially when it comes to supply chain finance. Though concepts like JIT (just in time) inventory and quick turnaround times from order-to-delivery have reduced inventory levels held drastically, most companies still hold onto the traditional 30-45-60 day of credit terms with their suppliers. This puts incredible financial stress on the supplier which in the worst case manifests in poor quality of supply. In the long run, this increases the total cost of ownership for the company, i.e. investment in more stringent QC processes, returns, disruption to the manufacturing process, supplier switching costs etc. Applying the same principles of collaborative thinking to supply chain finance will not only make the overall chain more resilient but also optimize the flows and pass on efficiencies in the long run to the end consumer.
In today’s business environment where “share holder value” is no longer a buzz word but the focus of every corporate board of directors, it might be wishful thinking to expect companies to share their margins or reduce days of credit to suppliers in the interest of collaboration. This is where a third party financial institution plays an important role. By providing liquidity to the supplier on the basis of the credit umbrella provided by the bigger company, the addition of the third party financial institution creates a win-win across all stakeholders involved. This is even more critical in the case of small and medium sized enterprises, which at this point are forced to spend only a fraction of their efforts on innovation and growth.
While some large corporates do have some form of supplier financing initiatives through tie ups with Banks and NBFCs, in most cases the coverage of the initiatives are limited (to some marquee suppliers) and in a larger amount of cases are a generic form of receivable financing based on existing credit policies of the financial institutions, which are out of sync with business realities. It is imperative for large corporates to have a supplier financing initiative for all their suppliers, especially the SMEs to manage their financial risks. In turn it is imperative for the financial institution to have a tailored product which reflects the operating realities of the industry and also the specificity of the supply chain. Collaboration of all three stakeholders, i.e. the large corporate, SME supplier and financial institution will be critical to ensuring a sustainable supply chain finance program.
We live in an interconnected world; therefore large corporates have the responsibility to ensure that their SME suppliers have access to finance, if they truly want to make their supply chains resilient.
Prashant has 11 years of experience in business strategy and operations, with specific expertise in the areas of project management, supply chain management and business process formulation , across the retail sector, United Nations system & international organizations, telecommunications & high technology, oil & gas and 3rd party logistics. He has successfully managed and delivered projects for clients based out of Europe, the USA, Africa and India.
At Capital Float, Prashant heads Business Development for Supply Chain Financing.
Oct 24, 2018
The fact that ecommerce is growing exponentially all over the world is undeniable. Entrepreneurs everywhere are competing with each other to get a piece of this lucrative pie. Definitely, starting a business in the virtual world entails much less costs, making it easier for more and more people to fulfill their dreams of running their own enterprise.
However, even with ecommerce, there are some things that do need to get taken care. For instance, you will need an impactful website that stands out among the crowd and you will need products and/or services that the market is currently looking for. You will also need to identify a network of suppliers that you can work with and hire employees to take care of the day-to-day activities as well.
Most importantly, you require capital to keep the business running and leverage business opportunities. This is where Capital Float’s Online Seller Finance comes to the rescue. If you, as a new entrepreneur, were to approach a bank or NBFC for a loan, you will be faced with difficult terms and conditions, the least of which is proving that you’ve run the business successfully for at least a year.
On the other hand, with the flexibility, ease of processing and convenience of accessing working capital even an amount as low as ₹1 lakh to as high as ₹3 crores, Online Seller Finance, specifically designed for ecommerce businesses, is the way to go.
1) Loan range from ₹1 lakh to ₹3 crores
We cater to a wide range of e-commerce merchants. Each merchant has a different capital requirement based on their business need or opportunity. With our wide ticket range, we cater to practically any working capital requirement of the online seller segment. These funds could be used for a variety of purposes such as making supplier payments, adding inventory during peak seasons or diversifying into new product categories.
2) Customized credit criteria
We acknowledge that each merchant is inherently different and must be treated individually. Unlike many traditional financial institutions, we don’t follow a cookie-cutter method to underwrite our customers. By leveraging Big Data & Analytics, we are able to underwrite each customer on the merit of their business performance and offer a tailored credit product. For example, the merchant is offered a specific loan amount basis their monthly sales on the marketplace and projected revenue.
3) Quick, online application process
We are a digital finance company and believe in limited paperwork. We offer the convenience of technology to our customers right from the start of the relationship. Borrowers can apply online using their mobile devices, as long as they are connected to the internet. The 10-minute application is very simple, quick and entirely hassle-free. The borrower can upload their documents online and need not visit a physical office for presenting the documents.
4) No pre-closure charges
Borrowers can close their loan by repaying the balance amount before the end of the agreed tenure. We offer the feature of ‘no pre-closure charges’, which means that the borrower will not be liable to pay any extra charges for closing the loan ahead of time.
5) Get up to 2x credit based on your marketplace sales
Online merchants applying for ‘Online Seller Finance’ can avail up to twice the amount of sales they make on e-commerce marketplaces. For example, if the seller makes ₹10 lakhs in sales per month, the seller can receive working capital funds of up to ₹20 lakhs. These funds can fuel growth on the marketplaces, helping the seller to increase their business geometrically. Higher the sales, the higher the eligible loan amount, higher the chances of leveraging business opportunities.
Our Online Seller Finance credit product is an unsecured working capital loan. The borrower need not pledge any security or asset as collateral to avail this loan. Funds are approved on the merit of the borrower’s business performance on the marketplace and not on their assets. Merchants can avail funds and operate without the anxiety of conceding their securities.
2) Funds in 3 days
Our technology and Big Data capabilities help us speed up the underwriting process. We understand that ‘timing makes all the difference’ to online merchants, given how dynamic the business is. Payments can’t be delayed and opportunities must be seized immediately. Bearing this in mind, we disburse loans to the borrower in less than 72 hours of the loan application.
3) Flexible repayment terms
Banks and other NBFCs typically function using the model of EMIs, or easy-monthly-installments. ‘Online Seller Finance’ allows you to repay the installment on a fortnightly basis. As a result, the installment is smaller in amount and is less burdensome to repay when compared to a monthly installment, which would typically be twice the sum. This way, your cash flows remain unaffected and you have more funds to deploy into your business.
4) Ideal for expanding your business
Financing the online seller segment is relatively new in the lending space. Not many financial institutions have fully understood this segment, which has caused several e-commerce sellers to return empty handed from formal lenders. Capital Float was the pioneer in digital lending to e-commerce sellers. Therefore, we’ve made it a lot easier for online merchants to avail finance for their business. Our partnerships with leading marketplaces like Amazon, PayTM, Snapdeal, Myntra, Shopclues, eBay, Craftsvilla, etc. has enabled us to reach to a wide range of sellers. Merchants on these platforms can avail easy funding and expand their business on the platform.
Eligibility and Documents
To qualify for ‘Online Seller Finance’ you must comply with the following parameters.
1) Applicant’s business must have minimum operational history of 1 year
2) Applicant’s partnership minimum vintage should be between 3-6 months
3) Minimum quarterly sales of ₹25,000
1) Bank statements for the last six months
2) KYC documents of the applicant and the organization
Fee and Charges
At Capital Float, we conduct business in the most transparent manner. This means, you’re only obligated to pay a processing fee of up to 2% for the loan. There are no hidden or pre-closure penalties during or after your application procedure.
Oct 24, 2018