5 reasons to pay EMIs/Credit Card payments on time

Timely payment of EMIs or credit card bills is an essential aspect of taking charge of your financial life. Very often, people miss their bill payments because of their busy schedules. Making on-time bill payments a priority will lead to many benefits and will keep you out of debt traps.

Here are five reasons to pay your EMIs or credit card payments on time:

  • Good credit standing: Making timely payments of EMIs or credit card bills will ensure that your credit history remains positive. A good credit score makes you creditworthy. Having a high credit score will enable you to avail quick, formal finance to address your needs in the future.
  • Avail loans easily: If you have a high credit score, banks or financial institutions won’t hesitate to sanction your loans. You can even get higher loan amounts with low-interest rates.
  • Save on fines: You may avoid the penalty or late payment fee that banks charge by paying the EMIs or credit card bills on time. This helps avoid increasing your financial burden.
  • Save money: When you pay your EMIs or credit card bills on time, you save more as the interest on the outstanding amount does not increase. Lenders may charge high interest on delayed repayments.
  • Keep the monthly payments low: When you miss your bill payment for a month, you will need to pay it the following month. So, the amount to be paid in the next month will increase. Your next payment will include two installments and also the penalty charge, thereby compounding the owable amount. 

Late payments can affect the financial position of people adversely. Make it a habit to pay all your dues on time. It will not only reduce your stress level but also help you avail of all the benefits mentioned above.

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The SME Lending Puzzle: Why Banks Fall Short

Let us consider the following hypothetical scenario:

ABC & Co., a small services firm, began operations in mid-2011. It reported a 40% jump in annual turnover from Rs. 5 Cr in FY 2012 to Rs. 7 Cr in FY 2013. As a startup, the company has not yet broken even and reported losses for consecutive years. The promoter is well educated, previously worked in organizations of repute for over a decade before deciding to float this venture. The short-term finance requirement of ABC & Co is about Rs. 40 lac for 90 days, but does not have any physical collateral to offer as security. At this stage, the promoter of ABC & Co. decides to approach banks and NBFCs in the market to fund this debt gap.

What would this promoter’s experience be in today’s scenario? Would he be successful in securing the necessary funds?

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According to a recent statistic, 33% of companies operating in the Micro, Small and Medium Enterprises sector have access to banks and financial institutions, while the rest remain excluded and are compelled to raise money through informal channels.

This debt gap is alarming especially in the backdrop of the fact that SME segment contributes nearly 10 percent of the country’s gross domestic product and 45% of all industrial output.

Till date, banks and NBFCs have not been able to finance this debt gap effectively. What has prevented or restricted them from profitably penetrating this sector? Is it due to inherent credit risk in the segment, lack of collateral, government regulation and laws, or simply because there are greener pastures elsewhere to lend money?

Lets us understand the debt requirement of the SME segment (both early-stage as well as mature entities) before we try to further dissect this issue. In our example, ABC & Co. could require financing for primarily two reasons:

1) Capex, i.e. medium to long-term finance for business expansion, product diversification, renovation of business premises, or purchase of machinery.

2) Working Capital i.e. to cover short-term immediate cash flow needs arising from day-to-day business operations.

To cater to this demand, banks and financial institutions already have specific products (both fund and non-fund based) that can be broadly categorized into two categories for the sake of simplicity:

1) Simple lending products, which would typically cater to the first requirement of SMEs for Capex. These are medium to long-term financing products in the form of equipment and machinery loans, high yield unsecured business loans, Loan against Property etc.

2) Specialised lending products, which typically include factoring, trade finance, cash management services, project finance, bank guarantee, or letters of credit, which typically cater to the second requirement of working capital finance.

As is evident from the above, it is not the lack of “products” that explains the under-penetration of finance flowing to the SME sector. Rather, it is in the design, applicability and administration of these products to the SME sector that banks have fallen short.

In an effort to go deeper, we can identify four key reasons among others, for this shortfall:

1)  Sole Focus on Financials: The current approach to SME lending in most institutions is still heavily dependent on business financials- i.e. looking at historical data to predict future creditworthiness. Typically this involves a lot of paper work and many visits to the applicant.

This approach has not been very successful in the SME sector to-date due to the fact that the financials provided by the applicant are often opaque given the cash nature of business transactions and incentives to under report income to save on taxes. ABC & Co., on this parameter alone (aside from business vintage) would be filtered out as the current financial position reflecting business losses would not be very appealing to most financiers.

2)  Bureau Reporting: There are two kinds of credit bureau reports that can be generated by member banks and NBFCs – Individual and Corporate. While individual records are provided by most bureaus, only CIBIL currently provides reports for corporate entities in India. Valid records for SME entities are still not very evolved in the country. And while the bureaus can provide data on credit worthiness of the individuals involved in any given company, they cannot give relevant insights about an applicant who is a first time borrower.

Since ABC & Co. is newly established, there would not be any bureau record on the company. The application would then have to be judged on the strength of the individual records for the promoter as well as the business viability of ABC & Co.

3)  Selective Segmentation: The implication of the above two factors is that only the “upper layer” of the medium to large enterprise segment is able to pass through banks’ and NBFCs’ credit assessment parameters, leaving aside the major chunk of “small” entrepreneurs and entities whose need for adequate finance is more pronounced. These small entities could be major links in the supply chains of large players, and their inability to access finance could have the ripple effects across the value chain.

4)  Lack of Collateral Security: Lending in India traditionally has relied on taking adequate collateral as a “risk mitigant” to cover the credit risks associated with SME lending and the ambiguity around appraising this segment. The Loan to Value ratio (LTV) becomes the yardstick to segregate and approve or reject cases based on risk. This ratio is inversely proportional to the risk perception of the applicant.

Since ABC & Co. does not have any physical collateral such as property or machinery to offer and the promoter has pitched in whatever money he had in the form of initial capital into the business, his application would be rejected by most banks and NBFCs in the market today.

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This problem of access to finance for SMEs in India is even more accentuated for early-stage companies or startups such as ABC & Co. In their case, past financial performance would be not a correct indicator of the future potential of the enterprise. After initial round of equity funding from family and friends or seed investors, working capital requirements or ad-hoc needs for short term finance would inevitably kick in and must be dealt with in a timely manner to keep the firm operational.

To conclude, traditional lending to the SME sector in India can best be described as a “One Size Fits All Approach.” The risk management techniques used by banks and other financial institutions today are invariably more suitable for medium and large corporate entities. The same set of rules when inadvertently applied to small and early-stage enterprises result in a faulty output, i.e. the systemic rejection of most SME loan applications like ABC & Co. Given the intense nature of competition in the lending industry today, the consequence is that too many banks and financial institutions end up chasing the same set of “good” customers, leaving aside a much larger untapped segment of SMEs in the process.

Watch this space for more articles on the subject as well as suggested ways to underwrite “small” and
“early-stage” entities in the SME sector.

(Image credit: http://blog.directcapital.com/misc/small-business-loan-video/) 

Oct 24, 2018

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Projections for the Future: Top 5 Small Business Trends in 2018

Thriving amidst difficult environments has never been easy for SMEs in India, but they continue to stand tall. Despite numerous challenges in the form of infrastructural constraints and lack of access to formal credit, they contribute to 8% of the GDP. Rightly called ‘the engine of growth’ for India, SMEs have scaled manufacturing capabilities, reduced regional disparities and balanced the distribution of wealth.

Small businesses are now being increasingly associated with innovation and employment, and the figures state likewise. The micro, small and medium enterprise(MSME) sector contributes to 69% of employment in India. With the growing penetration of technology into mainstream ecosystem, these industries are at the forefront of bringing the convenience of digitalization to the masses.

The Indian economy is expected to be a $5 trillion economy by 2025, and SMEs are cutting roads towards this goal. As we enter the first financial year post implementation of GST, some interesting small business trends are touted to play an important role for a smoother growth journey to global standards.

Here are the latest business trends that you can keep in mind while setting your objectives for FY 2018-19.

Business Trend 1: Rise of Online B2B Marketplaces

E-commerce marketplaces are gradually gaining momentum worldwide, and has branched out to B2B trading platforms. While this is still at an embryonic stage in India, there is no doubt that the potential it holds is huge. According to experts, the scope of the ecommerce B2B industry is six times bigger than the B2C industry, and is estimated to be worth $620 billion industry by 2020.

Companies such as Amazon Business, Alibaba, IndiaMart, Power2SME, etc. are popular online platforms that connect B2B buyers and suppliers to fulfill their business requirements. These digital platforms have helped small businesses surpass technical and geographical limitations to procure raw materials in bulk at reduced prices and also become official supply partners to large corporations. This is one of the hottest small business trends of 2018 that will present aspiring as well as budding entrepreneurs a level playing field with industry leaders.

Business Trend 2: Personalized Customer Outreach via Automated Tech

With the oldest of the millennials attaining 35 years of age this year, the target audience has shifted by a generation. For an age bracket that has been wrought in technology, this band of consumers need more than online communication. They seek a personalized line of contact when availing services from small businesses, with 60% of them choosing emails as a preferred way to establish this connect.

Since the millennial generation has the highest buying power in the market valued at $44 billion globally, this is one audience you don’t want to miss out on. You can target them by leveraging interactive videos, engaging images, and emails customized with these elements for varying demographics. The use of intelligent virtual communication applications will help you implement this in an efficient and cost-effective manner.

Business Trend 3: Easy Access to Business Credit with FinTech Lenders

The biggest hurdle for small business owners has always been financing. For a country with 50 million SMEs, there is an unmet credit deficit of a staggering $350 billion. Traditional lending institutions are limited by conventional underwriting that caters only to a certain strata of businesses. Lack of collateral, documentation and operational history have been crippling factors that prevented SMEs from qualifying for formal finance. This, in turn, pushed SMEs to the informal sector where the high interest rates charged by moneylenders fettered borrowers to a chronic cycle of debt.

But, FinTech lenders are shifting the narrative by leveraging technology and unconventional data points to provide affordable loans to small businesses as well as consumers. With customized credit products and zero collateral requirement, these digital financiers bridge the gap that had long existed in the market.

Business Trend 4: Big Data to Drive Operations and Decisions

‘Is Big Data too big for SMEs?’- is a question that requires intensive analysis, depending on the goals that define the small business and its operations. Many SMEs see big data projects as unapproachable and sophisticated, owing to the difficulties inherent in understanding huge datasets. However, studies reveal that a calculated use of big data has a colossal impact on the growth of small businesses and has been the chassis for many popular business models.

This business trend is expected to revolutionize the SME sector by speeding its pace of development. New-age digital lenders do finance technological incorporations if it shows a direct correlation to business growth, so you needn’t worry about the funds for investing in Big Data. Check out Unsecured Business Loans for more details.

Business Trend 5: Shifted Focus on IT Security

2017 saw one of the largest cyberattack worldwide, the WannaCry ransomware attack, that caused the encryption of data on computers running the Microsoft Windows operating system and risked the exposure of sensitive data of companies in over 150 countries. Though the attack was stopped within a few days of discovery, the total damages were estimated to be in billions of dollars.

The IT industry in India contributes to a key part of the country’s economy, a significant number of enterprises will begin to invest in dedicated security systems that focus on detection and response, a shift away from conventional systems that were based on prevention. Security enhancements offered by SaaS/Cloud based platforms have become more affordable for small businesses to establish a dominant architecture for data integrity management.

Oct 24, 2018

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Why Online Vendors Should Apply for Capital Float’s Online Seller Finance

Are you an online seller looking to optimize and grow sales? Given the highly competitive nature of e-commerce, it’s always advisable to have a cash flow option handy for successful expansion. Furthermore, you wouldn’t want to lose out on market opportunities due to the lack of convenient financing options. And that, is where Capital Float comes into the picture.

In the cut-throat world of e-commerce, having a lucrative financing option at the right time is likely to translate into a significant competitive edge. There are three key occasions, wherein, an online seller may require rapid financing:

  • Respond to an increase in sales by purchasing inventory
  • To be prepared for seasonal fluctuations in revenue, and bridge short-term gaps in liquidity.
  • To widen product portfolio by diversifying into other product segments or to widen reach by operating on a new marketplace

Here are a few compelling reasons as to why you must apply for Capital Float’s Online Seller Finance to maintain your competitive advantage in the business:

  1. Flexible loans that are customized to your need

The exciting features at Capital Float’s Online Seller Finance ensure speedy expansion for your business in a simple manner. As an e-commerce vendor, you can raise funds from INR 1 Lac up to 1 Crore, depending upon your cash requirements. Furthermore, we provide you with effortless repayment modes for a loan tenure between 90-180 days. Our partnerships with multiple, leading e-commerce platforms enables you to acquire our e-commerce seller loans to operate and expand across different online marketplaces.

  1. A quick, hassle-free process

        a) Minimum documentation

To apply for our eCommerce seller loans, you need not furnish a heavy stack of documents. All we would need from you are your bank statements of the last six months and KYC documents credentialing you and your business.

         b) Zero collateral

We provide unsecured loans, meaning we don’t take collaterals as guarantee for loans. You won’t be asked to pledge your property or vehicle to avail a loan from us. Our loans are bereft of the anxiety that are often associated with loans against collateral.

        c) Loans against marketplace sales

Our motto is to help businesses to ‘Break Limits’. We understand that many a time, businesses with potential are hampered by the lack of finance. We are committed to change that. You can avail Online Seller Finance on the basis of your proven sales on e-commerce marketplaces, receiving up to 150% of your average monthly sales.

  1. Apply anywhere, any time

While financial institutions like nationalized banks, private banks and traditional NBFCs not only take weeks to sanction a loan, but they also have tedious application procedures, Capital Float ensures immense flexibility in the process. We have designed a handy mobile app through which you can apply for a loan from anywhere, as long as you are connected to the internet. The four-step online application procedure is not only user-friendly, but allows you to raise funds without losing on precious time.

External financing is an excellent tool for you to grow as an online vendor and keep operations smooth. Capital Float’s sole aim is to bridge the current gap in the market with innovative and flexible credit products for online enterprises like yours. That said, Online Seller Finance is just the product you need to fulfill your finance requirements in a smooth, hassle-free manner.

Wait no more. Take your online business to the next level with our online seller loans. Click here to apply.

Oct 24, 2018