The Covid-19 pandemic has crippled several businesses and spawned deep-seated disruption in economic activities globally. With revenues running at minimal levels due to demand shocks, enterprises are undertaking major steps to prevent their working capital from drying up.
Optimising liquidity and working capital are the two top concerns of entrepreneurs in this current scenario.
The upheaval from the Covid-19 pandemic persists and will likely continue so with predictions of a third wave sweeping the country. Thus, companies need to devise plans to minimise the disruption in the supply chain and maximise access to liquidity or cash to sustain.
Avenues To Liquidity And Working Capital Amidst A Pandemic
The pandemic is tightening its grip around businesses, especially start-ups, by the day. Compounded by market volatility and demand shocks, companies are staring at an unprecedented scale of crises.
However, there are some time-tested avenues to ease liquidity and simplify working capital management. These are:
Businesses can access liquidity with secured business loan options extended by several banks and NBFCs. It is, in fact, one of the most sought-after options by small and medium businesses to mitigate a cash crunch. By pledging assets as collateral, entrepreneurs can borrow a substantial sum at competitive interest rates. Thereafter, they can mitigate the immediate operational costs and tide over shortages in business cycles.
Individuals with a healthy credit score can also consider obtaining a collateral-free loan. However, a business loan can be hard to come by for start-ups because of a lack of business vintage. Moreover, rising NPA rates are also making financial institutions more cautious concerning small businesses.
Covid-19 pandemic has adversely impacted the cash cycles of nearly every business. It has led to delayed payments from clients, leading to a significant crisis at all levels. One of the smart ways to tide over this crisis is to opt for invoice factoring. Entrepreneurs can sell their receivable invoices to lending companies and receive a significant portion of their value in advance. The factoring company will then collect the pending invoice amount from the respective clients at the stipulated time.
Almost similar to factoring, invoice discounting is one of the hassle-free methods of supplementing working capital to sustain during tyring times. Like invoice factoring, here too, organisations can leverage the value of their respective sales leger to obtain instant cash.
However, herein, entrepreneurs own the sales ledger and collect all outstanding receivables from their clients themselves. Therefore, it helps maintain confidentiality and does not allow clients to know about an arrangement of this sort.
It is extremely crucial as it helps retain a company’s credibility and value in front of clients and builds trust in their financial standing and management.
Businesses can also raise capital by way of selling the equity of their company to willing investors. In this regard, individuals can turn to angel investors or venture capitalists. It is one of the best ways to raise lump-sum working capital in one go.
Moreover, business organisations do not need any steady credit history to obtain financing this way. However, opting for equity-based financing means transferring a portion of the ownership stake to the investing company or individual.
Therefore, business organisations should tread lightly, research, and strategise before venturing into equity-based financing to avoid issues in the long run.
Revenue-based financing emerged as a suitable means of accessing working capital during the pandemic. Widely popular in the US, it’s slowly gaining traction among Indian entrepreneurs.
With RBF, organisations can conveniently raise funds from fintech companies premised on their estimated monthly, weekly, or annual earnings. Herein, they need to pledge a certain % of their future income as a revenue share, which has to be paid within a flexible tenure.
Unlike equity-based financing, there is no transfer of ownership in RBF. Therefore, a company can get easy access to funds without sacrificing a part of its equity. Also, unlike business loans, the interest rates on RBF are low. Plus, there is no fixed repayment tenure or amount that significantly reduces the debt burden.
The disruption caused by the Covid-19 pandemic is beyond estimation, with signs of a third wave already appearing. Therefore, organisations should strategise and undertake suitable measures to maintain a steady cash flow and working capital. A company’s finance team should be careful and conduct detailed research to choose the best financing option available after considering factors about their organisation and credit requirements.