Considerations When Taking Short-Term Business Loans

Going the entrepreneurial route is a tough decision to take. Several people contemplate it, but only a few take that leap. Starting a business may be very challenging, but what is even tougher is running a business.

Most small businesses are faced with liquidity crunches. They are required to make payments for raw materials, overheads and staff before their receivables become due. Such businesses have not earned the confidence to ask their suppliers for a lengthy credit period. On the other hand, their customers are able to demand 30, 60 or 90 days before the invoice becomes due.

In such a scenario, small businesses find themselves at the mercy of large banks to raise short-term loans. Here are some challenges that SMEs face while applying for a short term business loan.

Estimating the Money Required: If a business underestimates the amount of money required, it would find itself unable to implement projects, execute orders, retain employees and/or realize its expansion plans. On the other hand, if a business secures a loan amount that is significantly higher than its requirements, it would be taking on an interest burden that is not justified by its bottom-line. Taking the right amount of loan can help the SME adequately address the working capital need without having a surplus or lack of funds.

Applying to Traditional Banks: Most entrepreneurs do not have the funds to invest in their businesses and keep it running for a couple of years. Borrowing from friends and family can also be tricky or simply not an option. In such scenarios, small businesses often turn to traditional financial institutions to raise short-term loans. However, these loans have a very time consuming and complex application process. There is plenty of paperwork involved. The business has to present financials in a predetermined format with supporting documents and detailed projections.

Loan Approval: The process of loan approval can be long and complicated. Banks may take several months to even reject a loan application. Mostly, loans are provided only against collateral, which the business owner may not have. Even then, lenders would conduct a thorough analysis of the financial standing of the small business. The lenders would verify all the information provided by the applicant and this takes a long time, during which the liquidity problem of the business continues to worsen. Therefore, such loans may not even be a viable option for short-term, working capital requirements.

Repayment of Loans: Most short-term business loans from traditional financial institutions have a fixed repayment schedule that is in no way linked to the cycle of receivables of the small business. Moreover, they do not allow prepayment of loans. Thus, these businesses would need to continue to bear the interest rate burden, even if it has the funds to repay the loan.

Against the backdrop of these inherent problems with securing short-term finance, technology has helped offer relief from severe liquidity crunches. FinTech companies like Capital Float rely on cutting-edge technology to offer innovative products that are aligned to the requirements and nature of small businesses. Here are some points to keep in mind while applying for a short term business loan.

Easy Application Process: The application can be sent online via a form that takes around 10 minutes to be filled. The borrower can digitally upload all the required documents.

Fast Loan Approval: The use of powerful algorithms allows Capital Float to approve or reject an application within minutes. Thus, a small business does not need to wait for several months to receive a response. Once an application has been approved, the short-term business loan is disbursed within 72 hours.

No Collateral, No Guarantor: Loans offered by Capital Float do not require small businesses to put up any collateral. Unlike traditional lenders, there is no requirement of a guarantor to validate the loan request.

Loans Designed to Suit Their Purpose: Probably the best news is that the finance products offered by Capital Float take into account the specific requirements and nature of small businesses. For instance, the Term Finance product has been designed specifically for manufacturers, traders and distributors, while the Online Seller Finance product is perfect for businesses that operate on online marketplaces. The Taxi Finance product is meant for companies that are part of the booming radio taxi business in India. Merchant Cash Advance is a loan against card receivables and Supply Chain Finance is finance against invoices from blue-chip companies.

Repayment of Loans: The repayment of loans offered by Capital Float either be in correlation to the receivables of the business or may be in the form of flexible weekly instalments. Moreover, there are no pre-closure charges, like those applied by banks and other lending institutions.

Small-term business loans are a highly effective way to finance business cash needs. However, one needs to calculate the amount carefully and then identify the right financing institute and the right product. A small business needs to opt for customized products that suit their individual requirements and offer flexible repayment options. The innovative short-term finance options available today allow small businesses to continue their daily operations without disruption and gives these enterprises confidence to grow without apprehension.

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How You Can Improve Your Cash Flows With Supply Chain Finance?

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

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Impact of the Union Budget 2018 on Individuals

The Finance Minister, Arun Jaitley, announced the Union Budget 2018 on 1st February 2018 with components possessing the potential to have a transformational influence on various sectors of the economy. The current Indian economy has reached US$ 2.5 Trillion and is on its way to becoming the 5th largest in the world. GDP is projected at 7.4 % while the number of taxpayers has increased from 6.47 crores to 8.27 crores and a direct tax revenue growth rate of 18.7% has been achieved as of January 15th. The Union Budget is poised to leverage this upward trajectory and provide the impetus for further development at a macro and micro level. Many of the provisions in the Budget directly impact the daily life of a common man. This blog intends to dwell upon these provisions.

Health, Housing and Employment Receives a Major Boost

NHPS (National Health Protection Scheme) dubbed as the world’s largest government-funded healthcare program will be extended to provide up to ₹5 lakh towards hospitalisation for 10 crore families and ultimately 50 crore actual beneficiaries from underprivileged backgrounds.

Affordable Housing Fund (AHF) has been announced to ensure housing for all by 2022. Under this program, 51 lakh houses in 2017-18 and 2018-19 each will be constructed in rural areas with 37 lakh houses in urban areas.

₹40,000 crores worth of concessions were announced for senior citizens. The annual exemption limit on interest income from fixed and recurring deposit schemes including small savings instruments has been increased from ₹10,000 to ₹50,000 in addition to increasing the ceiling for Section 80D from ₹30,000 to ₹50,000.

To facilitate employment generation, Government will contribute 12% of wages to EPF for 3 years. The Finance Ministry has also reduced EPF deduction to 8% for women employees thus significantly increasing their take-home salary while maintaining employer contribution at 12%.

A Huge Fillip to Travel and Transportation – Growth and Modernisation

Travel and transportation received a huge fillip across roads, railways and civil aviation. ₹1,48,528 crores have been reserved for boosting railway network capacity and gauge conversion. Over 4000 km will be electrified in addition to redeveloping over 600 major railway stations and progressively equipping all stations and trains with Wi-Fi and CCTV. ₹17,000 crores have also been allotted for augmenting Bangalore’s suburban railway network. The Government will quintuple the number of airports to 124 and connect hitherto unserved 56 airports and 36 heliports under UDAN, the regional connectivity program.  Around 9000 km of highways will be completed by the end of FY 2017-18 and over 35,000 km of interior roads will be completed in Phase 1.

Digital India – Integrated Education and Research – Major Focus

Under the massive ₹3,073 crore Digital India Program, over 5 lakh Wi-Fi hotspots will be set up to provide broadband access to 5 crore rural citizens. This opens up an avenue for individuals in rural India to access formal finance from digital lenders via the internet. New centres of excellence in the areas of AI, Big Data, Quantum communication and Internet of Things (IoT) will be established to boost indigenous intellectual capital in these crucial areas. An additional ₹14,500 crores have been earmarked for strengthening telecom infrastructure including BharatNet. To harness emerging technologies, particularly 5G, an indigenous Test Bed at IIT, Chennai will receive ₹135 crores.

The Government has launched a new program RISE (Revitalization of Infrastructure and Systems in Education) funded by a non-banking financing agency HEFA (Higher Education Financing Agency) with ₹1 lakh crore. In higher education, under the Prime Minister’s Research Fellow Scheme, 1000 B.Tech students will be identified and facilitated to complete PhD at India’s prestigious institutes.  Up to 24 new medical colleges are to be started and upgrade of several existing colleges was announced to ensure at least one Government College for each state in India. Two new schools of planning and architecture will also be set up in addition to 18 more IIT/NIITs.

Personal Tax

On the personal income tax front, there are no new changes in income tax slabs or structure.  However, a standard deduction of ₹ 40,000 will be introduced in lieu of transport and medical allowances while a higher allowance will be allowed for disabled individuals. From April 1, 2018, long-term capital gains of more than ₹ 1 Lakh will be taxed at 10% though gains until January 31, 2018, and will be grandfathered. Dividends from equity Mutual Funds will now attract DDT to perhaps discourage investors investing in Equity funds primarily for dividends. In an effort to promote gold as an attractive asset class, the existing Gold Monetisation Scheme (GMS) will be made more investor-friendly and a network of regulated gold exchanges will be set up.

Balanced Budget

Though the budget was projected as agriculture-oriented and farmer-friendly, it is balanced and well-intentioned. Huge boost to expanding and upgrading transportation infrastructure especially the railways and supporting underprivileged with healthcare, housing and employment are the cornerstones of this Union Budget.  Substantial measures in the areas of digital economy and education pave the way towards India becoming an economic superpower.

Oct 24, 2018

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Convenient Supply Chain Financing Creates Resiliency In The System

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 Adhurty

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