Every MSME needs sufficient funds in reserve for smooth functioning of the business and to meet day to day financial requirements to operate well. It ranges from paying the salaries on a daily/monthly basis to permanent and contract employees, keeping the day to day expenses sorted, buying supplies when needed, keeping stock in advance etc. The amount you need for all these necessary needs is what can be simply called as the working capital. One of the most common challenges for MSME owners is not having enough working capital to run the business, while a business owner should be focusing on improving the business he/her shouldn’t be worrying about not having enough working capital.But reality is quite different and not every business owner is fortunate to have a positive cash reserve.
Think of an operating capital loan like a short-term loan or a cash advance for your business. It helps bridge the gap between your current income and your ongoing expenses. There are many different options available, each with its own pros and cons. The best choice for you will depend on your specific needs.
Short-Term Help for Temporary Needs
Short-term financing is ideal for temporary situations, like a seasonal rush or covering unexpected costs. These options typically need to be repaid within a year and offer quick access to funds.
- Line of Credit: Imagine a credit card for your business. A line of credit lets you borrow up to a certain limit and only pay interest on what you use. Need extra cash for a big order? Swipe your business credit card (figuratively speaking).
- Unpaid Bills: Have a bunch of invoices sitting around collecting dust? Companies called factors will buy those invoices from you for a discounted price. You get some cash upfront, and they take care of collecting the money from your customers.
- Borrowing Against Your Inventory: have you got some inventory kept at your warehouse/godown ? You can use that to get short term funds backed by your inventory balance.
- Short-Term Loans: Banks and NBFC lenders now provide short-term business loans designed for working capital needs. NBFCs are above the rest of the options since they are MSME friendly and makes the process effortless to business owners..
- Trade Credit: If you have a very good working relationship with your suppliers of various raw materials you can discuss delayed payments which work more like a credit line. It’s not easy however there are many businesses who have such agreements due to long term relationships and work well from a financial point of view as it is practically a short term working capital loan without any interest to be paid.
- Overdraft Protection: Think of this as a safety net for your business checking account. It lets you withdraw a little more than you have on deposit, up to a pre-set limit. This can be a lifesaver for unexpected expenses, but be careful of the high fees!
Long-Term Solutions for Bigger Needs
Long-term financing is better suited for ongoing working capital needs or for bigger investments that will boost your business in the long run.
- Term Loans: These are like regular loans, but with longer repayment periods (usually 1-5 years or more). They provide a steady source of funding for planned expenses.
- Equipment Financing: Your business badly needs to buy a machine and are stuck with lack of finance ? This is where an instant business loan can help you. Most NBFCs are providing machinery purchase loans which is very useful for MSMEs.
- Selling Ownership (Equity Financing): This involves selling shares of your company to investors. It can raise a lot of money, but it also means you share some ownership and profits.
- Reinvesting Your Profits: Instead of paying out all your profits to yourself, you can keep some back (retained earnings) to build up your working capital over time.
Choosing the Right Option
There’s no one-size-fits-all answer when it comes to working capital financing. Consider asking yourself these questions before you make your decision:
- How much money do you need? Don’t borrow more than you can afford to repay.
- How long will you need the funds? Short-term for temporary needs, long-term for ongoing needs.
- What can you afford? Compare interest rates and fees of different options.
- What’s your credit history like? This will affect your eligibility and interest rates.
- How will this impact your business? Consider ownership, cash flow, and flexibility.
Also be mindful of the lender you approach and how they would treat you from loan application to post disbursal. If you are an MSME business without a doubt an NBFC would be the ideal source for working capital as they keep the application process to disbursal easy for business owners without any bias.