In the 25 years since the introduction of economic reforms of 1991, India has travelled a great distance. From a stage of zero industrial growth and no foreign exchange, the country is now among the faster growing economies in the world and a net creditor to the IMF. Developments over the past couple of decades and the optimism surrounding the more recent political changes have led to the mushrooming of small and medium companies. In fact, around 75% respondents from India said they were looking to start a new business in a survey conducted by Entrepreneur’s Organization in August 2015. Despite global uncertainties, Indian entrepreneurs appear more ready and willing now than they have ever been in the past. This has resulted in an increase in the need for immediate solutions to business loans in India.
Need for Working Capital Finance
The absence of adequate working capital can mean serious trouble for a business, as this may result in the failure to procure raw materials, maintain inventory to satisfy demand fluctuations, retain trained workers and keep the utilities (like electricity) running.
Even the most profitable businesses face cash flow issues, since they need to meet expenses much before their revenues become due. The time lag between having to incur expenses and earning revenues creates the need for financing working capital through loans.
Choosing the Right Business Loan in India
Traditional financial institutions like banks do offer a solution, but the process of applying could be tedious and the sanctioning of funds may take months. On the other hand, businesses looking to finance working capital typically require immediate funds. Moreover, traditional financial institutions have stringent eligibility criteria that most small and medium enterprises (SMEs) cannot meet.
The urgent need for funds have been driving such businesses to the unorganized money lenders, who charge exorbitant interest rates. Startups that are already struggling to stay afloat and make their presence felt find it excruciatingly difficult to afford such solutions.
These factors have led to a mammoth change in the business loan scenario in India, with the evolution of new-age lenders that deploy powerful software in the application, approval and sanctioning processes. These fintech companies, which bring together financing working capital and cutting-edge technology, offer the perfect solution by providing small demonization business loans to SMEs in a very short span of time.
5 Options for Immediate Financing of Working Capital
Several types of business loans are available in India to fund the working capital requirements of SMEs. Here are five options offered by fintech companies:
Term Finance: Such a business loan works for service providers, manufacturers, traders and distributors who may need immediate funds not only to finance working capital but also to expand and diversify their business. Term Finance is an unsecured business loan provided by fintech companies to help SMEs retain positive monthly cash flows and be able to make short-term investments.
Pay Later Finance: This is a modern version of the cash credit offered by traditional financial institutions. Here, a line of credit is offered to a business, which can make multiple withdrawals within the sanctioned amount and repay the same to restore the balance for further usage. Pay Later Finance is a rolling loan product that allows businesses to meet immediate expenses. This type of funding is ideal for travel agents, small shop owners, distributors and B2B (business to business) companies.
Online Seller Finance: The surge of ecommerce in India and the sector projected to cross $80 billion by 2020 has driven the growth of SMEs offering online products and services. Online Seller Finance is funding provided to online sellers for expanding their inventory, diversifying their product categories or entering new marketplaces. Fintech lenders have tie-ups with online marketplace giants to provide quick and customized funding to online sellers looking to expand. The repayment of the business loan is linked to the receipts from online sales at these marketplaces.
Supply Chain Finance: A business requiring urgent cash can get a loan against invoices or accounts receivables. The lender collects the money from the debtor on the due date. This is a revolutionary way to pump funds into your business by putting up the business’s outstanding invoices as collateral. SMEs can receive immediate funds of up to 80% of their invoice value. Supply Chain Finance is the perfect solution for businesses facing cash flow slowdowns.
Merchant Cash Advances: A recently introduced product, Merchant Cash Advances involve payment of a lumpsum loan to a business in exchange for a daily share of its credit card sales. An important feature of this type of working capital loan is that no collateral or personal guarantees are required and only the quantum and regularity of the credit sales matter. In this type of financing, the processing of the loan application is very fast and there is no fixed due date for repayment, since this is linked to credit card sales of a business. These types of loans are available to even those businesses that have a low or no credit score.
An SME can choose from these options depending on the purpose for which it requires funds or the nature of the business. Financing working capital is no longer a herculean task. With the evolution of fintech companies, business loans in India have become easy to access. The quick sanctioning of funds allows businesses to fulfil their immediate needs.