Working capital is a difference between an organisation’s current assets and liabilities. Its availability determines an organisation’s overall efficiency of operating a business. Now that you know what is working capital, it is essential to understand its significance.
According to a study by IBM Institute, approximately 90% of Indian startups fail within the first five years of their establishment. One of the reasons for such an outcome is the inadequate cash reserves. Therefore, maintaining an optimum working capital is required to meet short-term financial obligations during a cash crunch. This article presents the sources to raise funds to maintain adequate working capital in small businesses.
What are the 5 ways to get working capital finance?
After knowing what is working capital, take a look at the following sources for raising funds and maintaining working capital:
- Fund from investors/utilizing personal finances
Small or new businesses that do not have strong credit scores can raise funds by approaching investors. However, in case of a new business, make sure to draw a solid business plan. Alternatively, liquidating one’s existing savings or borrowing loans from family members can provide initial financial support.
- Bill discounting
Bill discounting is one of the effective financial sources to get funds at discounted rate against producing the unpaid invoice to a financier.
Take a look at the following example to understand how it works:
Suppose an individual sold goods worth Rs.1,00,000 to a buyer on credit. The latter will get an invoice to pay the due amount within a specified date. However, if that individual quickly requires the fund from that sale to maintain an adequate cash reserve, he can sell that invoice to a financier. The latter will provide the amount after deducting a specific charge, say Rs.50,000, as a commission for providing this service. Thus, the seller will get approximately Rs.95,000 from that financer.
The lender produces this invoice to the buyer on or after the due date to collect the bill amount. Remember, the financer levies interest penalty in case of delayed payment.
- Flexi business loan
Selected financiers like Bajaj Finserv provides a flexi business loan. The existing customers can withdraw funds within a sanctioned limit. The interest is applicable on the amount withdrawn. One can also opt to pay interest as a monthly instalment at the first part of a repayment tenor. This reduces the burden of EMIs, and one can repay with ease.
- Trade credit
Businesses can avail of trade credit depending on their market reputation, financial position etc. In this, the buyer company purchases goods from a supplier without paying upfront. This outstanding amount payable to a creditor or supplier is a short-term credit to the buyer company. Suppliers usually provide this fund for three to six months. This type of credit depends on the business volume between the buyer and the supplier.
- Short-term business loan
Individuals can meet the working capital requirement with the help of a high-value short-term business loan. However, entrepreneurs with a business vintage of 3 years qualify to apply for this credit option. They also must possess a strong credit history.
Few leading NBFCs do not demand collateral to obtain this loan. They also provide pre-approved offers, which simplify the application process. These offers are available on several financial products, including business loans, etc. Check your pre-approved offer by submitting your name and contact number.
Thus, individuals owning a small business can choose any of the abovementioned ways to raise funds and maintain working capital for a smooth business operation. Therefore, before obtaining the necessary funds, it is essential to understand what is working capital to proceed without any inconvenience.