What Factors Should SMEs/MSMEs Consider Before Taking a Working Capital Loan?

If you are running an SME/MSME, there are several factors to consider while considering a  Working Capital Loan. First, to run a business’s daily operations, one needs working capital to cover their day-to-day expenses, from equipment and inventory costs to salaries. These operations require consistent cash flow, but the business may run into deficits because of uncertainties. In such circumstances, MSMEs can avail from working capital platforms like KredX. For instance, you can access Working Capital Loan from KredX’s Invoice Discounting Platform.

What Is Working Capital?

Working capital refers to the amount of capital available for the business to run its daily operations. It affects most aspects of the company, from paying suppliers and employees to ensuring the business is sustainable in the long term. This is the money you need to meet short-term and current business obligations.

As shown below, the working capital formula involves deducting current liabilities from current assets.

Working Capital = Current Assets – Current Liabilities

For instance, a working capital example of a company with current assets of Rs 1,00,000 and liabilities of Rs 80,000, then from the working capital formula, the working capital will be Rs 20,000.

Businesses need to ensure that they employ proper working capital management because if their working capital falls below certain levels, their business will struggle to survive in the cut-throat market. Securing a working capital loan can be an easy way to boost your cash position if there is a drop in cash flow. Interestingly, several trustable platforms like KredX’s working capital facility can increase your business cash flow. Here are some options to consider for a working capital loan:

Available Working Capital Loan Financing Options

1. Short-Term Business Loan 

You can solve your working capital requirement by taking a short-term business loan. This is the most common way to raise working capital for a business in a short time. A creditor will advance credit to a business that the business has to repay over some time in monthly instalments.

Business loans offer more flexibility and specialise in addressing different business needs. However, like any other loan, a good credit rating is necessary for the owner and the business. 

2. Working Capital Line Of Credit 

A working capital line of credit is a revolving working capital loan that gives the business owner a specific amount of cash they can draw based on business needs. The loan can be repaid over time or immediately. However, it is vital to note that interest rates apply to the loan immediately on the withdrawal of the borrowed amount. 

3. Invoice Financing 

Sometimes SMEs and MSMEs face working capital shortages because of unpaid or late payment of invoices. They can get working capital through invoice financing, a solution any business owners can use to borrow money against invoices owed.

For instance, KredX’s invoice discounting solution allows businesses to access quick cash by trading their unpaid invoices in return for working capital. Hence, getting access to cash for daily operations. Moreover, the process is risk-free since you don’t have to pledge assets, and you can grow your business without affecting your balance sheet. 

4. Corporate Credit Cards 

Business credit cards or corporate credit cards can help the business with its working capital requirement to meet cash needs. Just like a personal credit card, with a business credit card, you can get working capital for the MSME immediately without applying or waiting for approval because you can finance a purchase by taking an advance or using the credit card. Using your business credit card prudently can be instrumental in building business credit and improving loan approval prospects. 

What Factors To Consider When Looking For A Working Capital Loan?

There are several factors to consider when applying for a KredX working capital solution or any other working capital loan. Loans are meant to boost a business, and as a business owner, you have to ensure the business is better positioned to get the finances. Below are six such factors:

1. The Duration The Business Has Been Operational

The business’s duration is an essential consideration for a working capital loan. If the business is new, chances of qualifying for credit are minimal. For most lenders, a company must have been operating for at least two years in the same location to be eligible for a working capital loan. If the business is new, waiting for some time increases the approval chances and also ensures  that you make the best decision for the company. 

2. Type Of Business You Are Running

The nature of your business will influence your chances of getting a loan. For instance, businesses that qualify for working capital loans in India include sole proprietorships, partnerships, and private limited and public companies. In addition, the type of industry you engage in can be instrumental in the kind of working capital you need. For example, sometimes you may need invoice financing or a small business loan, but the industry and your needs will determine the loan type. 

3. Credit History 

Ensure your business and you have an excellent credit rating because it is one of the most critical factors defining an enterprise’s eligibility for a working capital loan. In addition, if there is unpaid debt, it can lower the chances of getting the approval for your loan. Therefore, ensure you pay off all debts and that your loan servicing is up to date to be on the safer side.

4. Cash Flow

A lender will first look at the business’s cash flow to ascertain that the company can repay the loan. Limited cash flow is among the first safety measures creditor’s consider while determining if they can afford the loan. Calculating your cash flow quarterly can help you know how to optimise this metric before you approach lenders.

5. Have A Plan For Why You Need Funding 

It would help if you had a business plan and avoided spontaneity when seeking a business loan. Businesses with well-thought-out business plans will always be considered by working capital platforms. For instance, you can qualify for a KredX Working Capital Loan facility if you have a comprehensive plan showing how you will utilise the funds you are borrowing and how you plan to repay the loan. Knowing why you need financing helps you decide the kind of loan to take. 

6. Have The Right Documentation 

Ensure you have the necessary paperwork before approaching a lender. You need to have the correct documentation to qualify for a loan.

Some documents you may need include –

• Proof of collateral (No collateral requirement in case of KredX Invoice Discounting)
• Business plan
• Loan history
• Balance sheet
• Business and personal financial statements 
• Income tax returns, etc.

Additionally, you need legal paperwork like articles of association, franchise agreements, CMA reports, and business registration and licences. 

Also Read: Why is a Working Capital Loan Better than a Business Loan?

Bottom Line 

As an SME/MSME, sometimes you can have cash flow deficits and resort to getting a working capital loan like Invoice Discounting from KredX  or any other loan. Irrespective of the kind of working capital loan you are going for, ensure you have the correct documentation, proper cash flow, and good credit history, among other things mentioned above, to be in a better position to qualify for the loan.

Get an instant working capital loan for your business needs in minutes. KredX offers a range of financing options and cash management solutions for small businesses like yours.