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.

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The Challenges of Interpreting Internal Rate of Return (IRR)

The Internal Rate of Return (IRR) is one of the most universal return concepts, and rightly so because of its effectiveness in interpreting returns from an investment. However, it is also one of the most difficult concepts to wrap your head around. In my personal opinion, the difficulty arises primarily due to the understanding of the fundamental underpinnings of the definition. It is not my intention to turn this discussion into a technical one; since the objective is to demystify, I will break it down for simpler understanding.

Firstly, the IRR is better understood when used to compare returns from two or more investments. The decision rule is rather simple – the higher the IRR, the better. The confusion arises when investors look at the IRR in isolation i.e. an investment yields a 20% IRR so what does that mean? The answer is a complicated one and often leads to more questions.

Secondly, the IRR is a multi-period return measure. What this means is that when investors would like to compare investments that span different time periods, IRR becomes the best tool for this purpose. For instance, investment A returns 20% in X years whereas investment B returns 25% in Y years. The question as to which investment performs better is best answered by the IRR.

Thirdly, the IRR works best when investments have conventional cash flows patterns i.e. a negative cash flow followed by multiple positive cash flows. Any variations herein are bound to be detrimental to the IRR calculation. For instance, you buy a stock (negative cash flow) and receive dividends (positive cash flow) during the holding period. The IRR works well in this scenario. However, if you short a stock (positive cash flow) and buy another one (negative cash flow) with the proceeds and finally square of the transaction (positive or negative cash flow) later on, the IRR may not necessarily yield desired results.

Lastly, due to its very definition, in some instances an investment may have no IRR at all or at least one that can be determined! Obviously, in such instances, the IRR is of no use and creates confusion in the mind of the investor. Therefore, the challenges in interpreting IRR arise when investors use the IRR for purposes other than those mentioned above.

Although this list is by no means exhaustive, it captures the salient features of the IRR. Hope this piece has helped simplify the concept and gives you confidence to seamlessly compare investments using IRR.

Vinay Basavaraj

Vinay boasts of a decade of experience working in both large and small organizations. His roles have ranged from sales to operations and even a stint in academia. He currently manages affairs in capital markets in Capital Float.

Oct 24, 2018

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Capital Float partners with Payworld to boost business of kirana stores in India

Capital Float, the largest digital lender in India, has partnered with Payworld to provide kirana store owners with convenient financing options, enabling them to expand business operations. Small retailers are often underserved by traditional financial institutions because of their limited credit history. These retailers can now avail hassle-free working capital from Capital Float, which will help them manage inventory and cash flows with added scalability.

There are more than 12 million small retailers in India. Many of these businessmen put decision-making on hold because of traditional credit barriers. Through this partnership, Capital Float will provide small retailers with collateral-free loans, which will help to exponentially increase their capacity to do business on the Payworld platform. Once the loan is approved, the retailer can request for funds using the Capital Float mobile app and the funds are disbursed within 10 minutes.

“Due to the lack of established lending norms and consequent delay in financing activity, existing and new players in the retail space have lesser access to credit, which affects their growth and expansion plans”, said Gaurav Hinduja, Co-Founder, Capital Float. “With Payworld, we have simplified the lending process so that neighbourhood kirana stores are able to fulfil their financial needs and better service their customers,” he added.

With India becoming digital, Payworld helps customers in remote locations with limited access to electronic payment methods, perform daily transactions like booking bus tickets or paying mobile bills via Payworld’s network of retail points, which includes kirana stores. A proprietary algorithm developed by Capital Float uses non-traditional, surrogate data sources, including each retailer’s performance on the Payworld platform, to build a personalized credit profile and provide customized finance options to the retailer. In the long term, this will also develop an official credit profile for these retailers, thereby increasing their chances of availing credit products from traditional financiers.

“In keeping with our business philosophy of ‘Making Life Simple’, we have partnered with Capital Float to provide the retailers in our network the support they require to boost their business. This is critical in building retailer loyalty to our platform, giving them the confidence to increase the number of transactions, positively impacting revenues for them and us” said Praveen Dhabhai, COO , Payworld.

Click here to read the full press release on The Economic Times

Oct 24, 2018

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Changes in the GST Taxation System – with effect from 15 November 2017

Composition Scheme Changes

  • GST rate at 1% for manufacturers and traders
  • Composition scheme limit to be extended to ₹1.5 crore
  • Composition tax of 1% on turnover of taxable goods
  • Interstate sales are not permissible for composition dealers. Input tax benefit not allowed.

GST Filing Extensions

GSTR form Previous Due Date Revised Due Date
GSTR-5 (for Non-Residents) Before 20th August 2017 or & days from date of registration 15th December 2017
GSTR-4 (for Composition Dealers) 18th October 2017 24th December 2017
GSTR-6 (for Input Service Distributors) 13th August 2017 31st December 2017
ITC-04 (for the quarter of July-September) 25th October 2017 31st December 2017
TRAN-1 30th September 2017 31st December 2017

Taxpayer Relief Measures

  • Reduced Late Fee: For delay in the filing of NIL returns, late fee will be reduced from ₹200 per day to ₹20 per day.
  • Credit of Late Fee: For filing of GSTR-3B for the months of July, August and September, late fee has been waived. Any late fee paid will be credited back in Electronic Cash Ledger under ‘Tax’ and can be utilized for GST payments.
  • Manual filing for ‘Advance Ruling’ to be introduced
  • Export of services to Nepal and Bhutan are now exempt from GST. Input tax credit, if paid, can be claimed for refund.
  • Taxpayers with turnover less than ₹1 crore should file invoices every month, while those with turnover greater than ₹1 crore should file invoices every quarter.

Revised GST Rates for 178 Goods and Services

Goods/Services Present GST Rates Revised GST Rates
Guar meal, Khandsari sugar, Dried or frozen vegetables, Uranium ore concentrate, Hop cones, Unworked coconut shells 5% Nil
Desiccated coconut, Idli Dosa Batter, Coir products, Fly ash bricks, Worn clothes or rags, Fishing hooks, Leather or chamois after tanning or crusting, Nets of textile material, Restaurants (non-Ac) 12% 5%
Potato flour, Chutney powder, Sulphur recovered as by-product in refining of crude oil, Specified parts of aircraft, Scientific and technical apparatus, Computer software and accessories, Restaurants (AC) 18% 5%
Condensed milk, Diabetic foods, Refined sugar, Medicinal grade oxygen, Printing, writing and drawing inks, Pasta, Curry paste, Mayonnaise and salad dressings, Mixed seasoning, Parts of agricultural & sewing machinery, Bamboo and cane furniture, Frames and mountings for spectacles, Hand bags and shopping bags of cotton and jute 18% 12%
Wet grinders, Tanks and other armoured fighting vehicles 28% 12%
Chewing gum, Chocolates, Preparation of facial make-up, Preparations for oral hygiene, Toothpaste, Shaving and after-shave items, Shampoo, Deodorants, Detergents, Granite and marble, Handmade furniture, Electric switches, Watches, Sanitary ware, Cases, Cutlery, Refrigerators, Flavoured drinks, Water heaters, Fire extinguishers, Printers, Automatic goods vending machine, Transmission shafts and cranks, Fork-lift trucks, Self-propelled bulldozers, Batteries, Static converters, Vacuum cleaners, Cameras and projectors, Microscopes, Musical instruments 28% 18%

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Oct 24, 2018