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

Rajath Kumar

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.