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Impact of GST on Working Capital for Businesses

The Goods and Services Tax or GST is ready for a rollout on July 1, 2017. Various rules, procedures and action items have already been outlined for the transition to the new, unified system of indirect taxation. Businesses and taxpayers alike are expected to embrace these changes and get ready for the new normal—the era of standardized taxation. GST is expected to impact businesses significantly, especially those with cross-location presence, with operations across states. Both large and established goods and service providers, as well as SMEs, will be significantly impacted, both in terms of financial and operational sustainability.

What is GST?

GST will enable standardization of the indirect taxation under four slabs—5%, 12%, 18% and 28%. The change in tax rules will have a direct impact on cash flows and working capital loans for businesses. From the line of credit to taxation levels and timelines, businesses will have to reassess and realign themselves. On the one hand, local and Central taxes such as VAT, Service Tax, Excise Tax and others will be subsumed; on the other hand, tax slabs may increase; for example, from 15% under Service Charge to 18% under the third GST slab. As a result, immediate available working capital finance levels will change.

GST and working capital

Working capital is a key factor in the health of a business. Businesses should focus on periodically assessing their working capital needs. The impending GST rollout makes this even more imperative. This is because the tax bucket your business falls under will change depending on various factors such as the nature of business, locational spread and more. Not just this, the rules and timelines for availing a line of credit will also be revamped under the new GST regime. This means that cash flow will be impacted, and you may need to look for new sources of working capital finance. After all, sustaining day-to-day business operations is essential to growing your business, especially if you are an SME with low financial reserves. Working capital is, in a way, a reflection of the financial health of your company.

Here are some of the key changes GST is expected to usher in:

  1. Input tax credits will open up: According to the current tax system, input tax credit is available only on inputs that are related to taxable output. For expenses that are not related to taxable sales, input credit cannot be availed. However, under GST, a feature called the “Furtherance of Business” has been introduced. Under this, credit is allowed for any kind of business input, irrespective of whether it is directly used for “taxable sales”. This is a positive development and increases the scope for business to avail an additional line of credit. As a result, the immediate cash requirements will reduce, and working capital flow will get better. Businesses must closely study the GST clauses to understand how to benefit from input credit across newly added areas.
  2. Timeline of tax payment: Under the new GST rules, the tax is levied when the stock is transferred. As a result, businesses will not be able to claim tax credits till the time of sale, which may result in a huge time lag. Working capital levels might experience a drop during this time. Evaluating working capital finance specialists such as Capital Float is recommended, to ensure that business operations remain unaffected.
  3. Moving goods will be easier: Under the current tax regime, a lot of time and effort is spent by companies who have multiple presence across states (warehouses, offices, factories etc.)—they need to adhere to multiple laws such as octroi, CST and so on while moving goods across state borders. This complexity adds to the cost of doing business across states. With GST, this movement of goods across the country will be simplified and more cost-friendly.
  4. Imports will be costlier: If your company is in the business of procuring raw materials from outside, you may experience escalated costs soon. The current import duty rate of 14% will be replaced by a standard GST rate of 18%, making imports expensive.
  5. Reprimands for suppliers’ non-compliance: The input tax credit levels will depend on whether your suppliers comply with taxation and financial norms. This will make it imperative for your suppliers to declare their outward supplies along with their tax payment.  You will also be held accountable if your supplier fails to furnish valid returns. This is an unfavourable practice for your business since in the event of their non-compliance, your input credit tax claims can be reversed and you may have to pay interest. It is, therefore, important that you assess your vendor base from a compliance perspective to avoid impacting your working capital

These are some of the direct ways GST will impact the working capital of your business. Should you need to augment your working capital to ensure a healthy cash flow under GST, you can turn to new age fintech lenders like Capital Float who are creating innovative and customised financial products. Our term finance offering, for example, is tailored to ease your working capital crunch with features such as zero collateral requirements, 3-day loan disbursal and customized credit criteria. Click here for more GST Blogs.

Oct 24, 2018

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A digital prescription for the pharma industry

Must explain to you how all this mistaken idea of denouncing pleasure and praising pain was born and I will give you a complete account of the system, and expound the actual teachings of the great explorer of the truth, the master-builder of human happiness.

Oct 24, 2018

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Working Capital Financing: Why It Is Essential For The Success Of a Business

India is on the path of robust economic growth. According to official figures, the economy was valued at $2.2 trillion in 2016, making it the world’s seventh largest economy in terms of nominal GDP. The Indian economy is expected to reach the $5 trillion mark by 2025, according to a report published by Morgan Stanley in February 2017. India seems to have all the right ingredients in place to achieve this phenomenal growth; the country’s millennial population is massive, there’s availability of cheap labor, the government’s policies are favorable, Indians have exhibited high adoption of the latest technological advancements and the SME segment is growing at a fairly healthy rate.

The SME (Small and Medium Enterprises) sector is critical to the development of the Indian economy. It contributed 40% of the nation’s exports and 45% of total manufacturing output in 2015. The segment’s contribution to India’s GDP is expected to grow from 17% recorded in 2010-2011 to 22% by 2020.

Despite these facts, the SME sector has witnessed some challenges with regards to financing. The need for cash to manage daily operations and the inability to access commercial finance have hindered the development of SMEs.

Why is Working Capital So Critical for Any Business?

All businesses need some funds to run their daily, weekly and monthly operations. Working capital is, therefore, essential for the smooth working of a business. The main reasons for working capital being so important are:

Enhances Solvency: Working capital aids a business to operate smoothly and meet all its short-term expenses, including purchasing raw materials, payment of salaries and meeting overhead expenses. Some of these payments cannot be delayed. Having sufficient liquidity helps the uninterrupted flow of production; thus, maintaining the solvency of a business.

Increased Goodwill: When a business is able to promptly meet its regular expenses and pay salaries on time, it generates goodwill, not just internally with employees but also with suppliers and distributors.

Uninterrupted Supply of Raw Materials: Quick payments ensure regular supply of raw materials. Suppliers of raw materials are usually apprehensive about small businesses being able to make the payments and do not offer a suitable credit period. The inability to pay suppliers can result in production coming to a standstill.

Improved Ability to Face Any Crisis: Apart from the smooth functioning of business operations, working capital ensures that any financial emergency can be handled with ease. Sometimes businesses face an unforeseen event, like an order being rejected, unfavorable weather conditions or the unavailability of a particular resource. A business that has sufficient liquidity can cushion itself against such situations. Thus, the financing of working capital defines the financial health of a business and how smoothly it can operate under different circumstances.

Why is Working Capital Finance So Difficult to Get for SMEs?

The most critical challenge that even profitable SMEs face is the lack of working capital, given their inability to access commercial finance. Public sector banks are burdened by bad debt loans to offer any support to these companies. Traditional banking institutions are apprehensive about offering commercial finance to SMEs and place stringent eligibility criteria for approval. Most of their loans require collateral to be furnished even for financing of working capital.

The greatest problem is that the loan application and approval process of traditional banking institutions is so tedious and prolonged, that SMEs find it excruciatingly painful to access these options. They may have to wait months only to have their loan application rejected. SMEs, therefore, look for alternate sources for financing of working capital and turn towards unorganized moneylenders who charge exorbitant interest rates.

Working Capital Financing Needs Met By Technology

SMEs need financing of working capital. They need swift and easy availability of commercial finance, without the need for extensive paperwork and collateral. The solution finally arrived in the form of FinTech lenders like Capital Float.

The FinTech segment has revolutionized the financing of working capital for SMEs by using cutting-edge technology in the loan application, underwriting and approval processes. This enables the disbursement of funds to SMEs within a matter of days.

Types of Working Capital Financing

There are a number of flexible, short-term and collateral-free loans offered that can be used to service new orders, purchase inventory and maintain cash cycles. These include:

Term Finance: This is ideal for SMEs particularly in the manufacturing and distribution space that need funds to meet operational needs or to expand and diversify the business.

Online Seller Finance: This is best suited for businesses that sell their products on leading online marketplaces. Capital Float has partnered with India’s largest marketplaces, like Amazon, PayTM, Snapdeal, Myntra, Shopclues and eBay to offer eCommerce sellers customized working capital finance.

Pay Later Finance: This product offers a credit facility and suits SMEs that have to regularly replenish their inventory. This revolving credit facility enables a borrower to make timely supplier payments from a predetermined credit amount. This amount can be reset upon repayment and is made available for further use.

Merchant Cash Advance: This credit solution is for businesses that receive payments via credit / debit cards via PoS (point of sale) machines. Capital Float has partnerships with multiple PoS machine vendors such as Pine Labs, Mswipe, ICICI Merchant Services, MRL Posnet and Bijlipay, expanding its reach to merchants across the country.

Supply Chain Finance: This commercial finance product allows businesses to use their invoices or accounts receivables as the basis to gain access to liquid funds.

SMEs are of strategic importance to the Indian economy and deserve a business climate in which they can thrive and grow. The financing of working capital made available by FinTech lenders will help the SME segment to move forward and contribute significantly to the growth of the Indian economy.

Oct 24, 2018