Successful SMEs know how to employ working capital to benefit their business. Access to finance at the right time helps profitably meet the current demand while also enabling future-proofing the company. 

When the short-term financial needs of SMEs are taken care of, there is a ripple effect across the supply chain ecosystem. But, how can businesses access this finance on time every time? And amongst the gamut of options available to them, which one is best suited for their needs? 

The wide bouquet of working capital offerings

With the plethora of working capital loans on offer, a business owner may be overwhelmed and often unsure of what would work best for their unique requirements. 

Let us first understand the wide variety of offerings available:

The most obvious option is to have an overdraft account for meeting day-to-day expenses. Another option is a working capital demand loan that allows businesses to use funds to meet any short-term general expenditures. 

An entrepreneur can also get easy access to finance based on turnover as per the GST returns. Tata Capital’s GST Loan and GST Bridge Loan are two products that small businesses can avail. The GST loan aims to address the general working capital requirement of the MSMEs. In comparison, the GST Bridge Loan considers GST paid for unsold inventory and supports incremental working capital finance needs.

If businesses have strong trade relationships, supply chain financing can be an excellent option to extend credit on supplier payments, discount invoices, or benefit from early payments. 

Additional Read: Planning to avail a working capital loan? It just may be the best thing for your business

The benefits of Supply Chain Financing 

Small and medium enterprises in India have been actively using Supply Chain Finance to finance their short-term credit needs. Supply Chain Financing could be available as Channel finance, Invoice Discounting, or Purchase Order Funding. 

Channel Financing or inventory financing helps procure inventory without investing capital upfront and extending payment terms for businesses to pay after liquidating the purchased stock. 

Invoice financing helps businesses discount their bills with leading corporate customers and access early payments instead of waiting until the end of the credit period. Purchase Order Finance is pre-shipment financing available for companies to access working capital to fulfill a purchase order from a large corporate. 

Supply chain financing solutions are based on the underlying trade relationship between buyers and sellers and can offer an additional line of credit for small businesses. Given that they rely on the strength of the buyer’s balance sheet, the terms of borrowing are competitive in terms of rate of interest, repayment tenures, and collateral requirement.

However, they come with a pre-determined end-use of funds – that is, to finance trade between the buyer and seller. So, these funds cannot be utilized for general working capital needs.

Effective Working Capital Management

Choosing the right working capital offering

Make sure to consider the following factors before choosing the right working capital offering: 

  1. Purpose: Is the purpose of borrowing to meet general operational expenses or specific end-use of financing inventory? 
  2. Timing: Do you need to access funds pre- or post-shipment? Do you need selective access to meet interim requirements like GST obligations or a steady line of credit that meets continuous operational expenditure? 
  3. Security: Do you have assets to hypothecate to take general-purpose working capital loans, or are you looking for unsecured supply chain financing alternatives? 
  4. Tenure: How long do you need to access the funds? Would a rotational limit with on-demand access all year-round help? Or do you need project-based funding like Purchase Order financing for a specific trade transaction? 
  5. Cost: What would be the cost-effective means to meet your financing requirements?

Additional Read: Five ways working capital can work for your business

Conclusion

There is no one-size-fits-all policy here. Working Capital solutions need to be tailored to meet your unique business requirements. At Tata Capital, we help you choose the right fit! Our team leverages decades of experience to understand your specific business needs and offer you a solution that suits your requirements. 

Tata Capital’s end-to-end digital platform from onboarding to settlements facilities a user-friendly customer experience. Take control of your working capital management by talking to one of our advisors.

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