For a layman understanding working capital might not be that easy. Working capital according to the accounting definition is Current assets minus the current liabilities. By current assets it is meant that the assets that can be converted to cash within 12 months. Same goes for liabilities as well, something that you owe and you have to pay it back at the earliest of 12 months. Something that crosses 12 months is considered long term. The whole concept of working capital revolves around short term assets and short term liabilities. So the money that a company has after subtracting short term assets and short term liabilities is the working capital. This is what a business uses to run its day to day business i.e. the money that helps the business carry on its daily operational activities without any hassles. Paying wages, rent, invoices or anything that keeps the business ongoing comes under the operational activities. Working capital loans are small in size in comparison to term loans (long term loans) and have a very short duration (considering that it is required to run daily business) with high interest rates and require real quick repayments.
Working capital turnover is how many days it takes for a company to convert its working capital into revenue. The faster the company is able to do that, the better it is. Working capital loans are an easy way to have funds on tap to meet emerging business opportunities or finance their consumables or any expansion activities.
A good example of working capital loan would be let’s say someone wants to start a hotel. A long term loan in that case would be required to purchase furniture, interiors, land, kitchen equipment, CAPEX (capital expenditure) but a short term i.e. a working capital loan would be the one used for paying daily bills for payment of vegetables, wages or some other provisions. Also Working capital loan is drawn as per the need and can be renewed by the banks every year. It is never used for the purpose of long term investments per se but to cater to day to day cash requirements.
We at LOANMEET offer a good option for working capital loans through P2P lending as we put up a request for the working capital loan on the borrower’s behalf in front of the lenders who have joined our platform.
There are a few barriers in the market which cause a resistance for small and medium enterprise and even farmers (India is a land of farmers) who need money during the time of harvest to repay loans. Recognizing this, several farmer producer organizations (FPO) have been set up in India that handle all the steps i.e. from processing to marketing the agricultural produce. These FPO’s would need money to pay the farmers on time as payments for the agriculture output generally takes a while and hence these require working capital loans. Given the current banking norms FPO’s are unable to raise loans most of the times as lack an equity base and their inability to post collateral.
Generally for small and medium enterprise bank loans or NBFC loans are possible if the enterprise has been into profitability for at least three years and good two year of credit history with annual turnover crossing 25 Lakh for last 3 years. This is unfavorable for most of the companies as it takes time for the businesses to breakeven and generate profitability today. Meanwhile they would require capital to grow and keep their operations going. We here are LOANMEET feel that any small business that has been generating a turnover of at least Rs 8-10 Lakhs from the past couple of years has a good opportunity to avail loan and grow its business. Asking for a too small a loan is a common mistake these firms do, similarly asking for too much can cause lenders to hesitate. Hence providing a cash flow statement and profit forecast for maybe the next five years would bring clarity to back up the budget.
We got in touch with a chartered accountant who runs a consultancy and helps small enterprise avail loans from banks. Small traders according to him generally get a loan in the form of CC i.e. cash credit. Where cash credit is decided on the basis of its sales, its debtors and its stock value. There are a lot pre conditions according to him that have to be fulfilled such as a pre-existing business should have been in operation in the same line of activity for more than two years. A business looking for a loan of around minimum Rs 10 lakhs should have a sales turnover of minimum Rs 50 lakh and a y-o-y sales CAGR of at least 20%. For a loan of Rs 25 lakhs the sales turnover should exceed Rs 1 Cr. as per the audited accounts. Drawing power, which is the limit up to which a firm or company can withdraw from the working capital sanctioned, is determined on 20% of the gross sales and 20-25% of its insured stock value. Hence the margin is quite low i.e. 20-25% on average on the stock value (also the stock should be insured) and 20-30% on the debtors i.e. the bills that have been discounted or on receivables up to 90 days. Cash credit is generally renewable every 12 months by the bank. Not forgetting the interest rates that are as high as 15-18% with processing fee as much as 1.5% to 2% of the total loan amount. Also the company should have a minimum 4 year IT return which kind of excludes most of the companies from this opportunity of working capital loans considering the fact that most of the India went alive with the Make in India campaign, thus coming up with small businesses in various sectors.
With the margins i.e. the loan amount that can be availed being low and processing fee very high and not forgetting the pre-requisites that are required we feel it is extremely difficult for the small businesses to borrow at cheap rates. We here at LOANMEET are trying are best to make life easy for small businesses and help fuel growth in India as we feel major chunk of the economy is and will be controlled by the SME’s and MSME’s in the near future. Make in India? Yes come join LOANMEET and borrow up to your real potential with low interest rates and let your business grow. Borrowing here at LOANMEET is like asking for money from the PE’s and the VC’s minus the equity share that you have to give in case of funding. So borrow hassle free with minimum documentation with no compromise on equity share as you pay your duly interest rates.
Come join LOANMEET.