What is Cash Crunch?
Small business cash flow management is a critical part of operating a company. Working capital cash flow determines whether or not the operations can continue uninterrupted. If there is a shortfall, the business can come to a grinding halt. Along with infrastructure, government policy, marketing, machinery, and technology, securing a loan is the most significant impediment to the growth of micro-small-and-medium enterprises (MSMEs) in our country. Moreover, capital is a constant problem for MSMEs, apart from knowledge gaps, a lack of collateral, lenders’ low appetite for risk, and lenders’ lack of expertise.
Many MSMEs lack the necessary capital to finance their everyday functioning and hence suffer from a severe cash crunch. Those that are capable of financing day-to-day expenses can also fall short when it comes to unexpected spends like sudden repairs, inventory purchases, or financing a big order. This impedes them from making the most of market opportunities, and in severe cases, can even compel them to shut shop. But what if we tell you that we have a solution to fix this problem? Working capital loans are the ideal solution to help MSMEs manage the problem of cash crunch. Here’s how working capital loans work.
What is Cash Crunch for Working Capital?
Working capital is essentially the resources required to operate a company’s day-to-day operations. For instance, money for raw material purchase, staff salaries, office maintenance, etc. A working capital cash crunch occurs when a business doesn’t have enough funding to run its day-to-day operations, falling short of money to pay bills, employee salaries, overheads, etc. In such a scenario, MSME entrepreneurs have a few options. They can either dip into personal savings or stake assets in order to secure a loan to finance the business expenses, or they can borrow from informal sources. Neither is ideal
Another alternative they can opt for is a loan from a new-age lender like a fintech, which does not require collateral to issue a loan. A loan that is used to finance all of these operations is known as a working capital loan. By securing a collateral-free working capital loan, MSME entrepreneurs can ensure the smooth running of their business without compromising any existing assets or personal savings.
Grow your MSME with collateral-free business loans
Why do MSMEs Face the Problem of Cash Crunch?
By virtue of being small businesses, MSMEs often operate on limited capital and resources. As a result of this, they can face cash-flow issues resulting from a range of issues. These factors can add up to a cash crunch, which impacts their operations. For them to operate smoothly, it’s imperative to efficiently manage working capital and cash flow. Here are some factors that affect cash management and working capital for MSMEs:
- Unmanaged inventory or erratic demand, which leads to insufficient stock or inventory control.
- Spending on unprofitable goods or services resulting in losses, adding up to a cash crunch.
- Delayed payments by customers, which can result in gaps in the cash flows.
- Not having enough liquidity or limited resources to make up for shortfalls in cash flow.
- Not having easy access to capital through business loans due to lack of collateral access and credit history.
- Unexpected or emergency expenses cropping up, from a sudden need for machinery repair, inventory purchase, or servicing a large order.
Importance of Improving Working Capital
The importance of improving working capital for sustaining operations and fostering growth in businesses can’t be overstated. The impact of working capital management is evident as it is the lifeblood ensuring smooth day-to-day operations, covering expenses like employee salaries, rent, and utilities. Adequate working capital allows MSMEs to seize opportunities, like bulk inventory purchasing to avail of discounts or investing in cutting-edge technology and equipment.
Improving working capital provides better liquidity, which protects businesses against unforeseen expenses and emergencies, allowing them to weather economic setbacks. It also strengthens relationships with suppliers, ensuring timely payments and favorable terms. Efficient working capital management optimizes cash flow, improving the financial health of the business. It empowers MSMEs by enhancing agility, competitiveness, and long-term sustainability in competitive markets.
Tips to Manage Cash Crunch
Small business cash flow management can be tricky for MSME entrepreneurs. Here are a few tips for MSMEs for effectively managing cash flow and working capital to avoid a cash crunch.
- Prioritize Essential Expenses: Focus on crucial costs like payroll and utilities.
- Negotiate Payment Terms: Extend agreements with suppliers to ease immediate financial strain.
- Utilize Credit: Make use of short-term loans or bill discounting loans to bridge cash gaps.
- Manage Inventory Reduce excess stock to free up cash flow.
- Optimize Cash Flow: Proactively manage finances to navigate cash crunches effectively.
What are the Benefits of taking a Working Capital Loan?
- Time is money for a company that operates in a competitive and fast-paced world. So, you don’t want to waste time if you need to buy raw material to complete a large order or if you’re getting a great deal on a vital input part.
- Conventional loans will stifle your progress under such circumstances. As a result, you may not be able to make a strategic decision that is time sensitive. This is where a working capital loan from a non-bank financial institution (NBFC) will help. Moreover, such loans can be obtained easily.
- One of the most important advantages of a working capital loan is investing the money however a business owner wants. When seeking venture capital or equity investment, the entrepreneur must share a comprehensive budget and obtain approval for spending. However, with a working capital loan, entrepreneurs are free to spend it as they please.
- Expenses are determined by the business’s immediate and short-term needs, as well as cash availability. Therefore, a working capital loan is a good choice.
How to Avail of a Working Capital Loan?
At Kinara Capital, we offer collateral-free working capital loans to MSMEs engaged in the manufacturing, trading and service sector. Our unsecured business loans are disbursed within a day. The first step is to check your eligibility on the myKinara App, which only takes one-minute. Following which, you can upload your documents and complete the rest of the process in your preferred language.
Over 77,000+ MSMEs have availed of collateral-free business loans from Kinara Capital. This is due to our quick loan processing time that requires minimal documentation. MSMEs can get a business loan within 24-hours!
Conclusion
Cash crunches are not uncommon among MSMEs, since they operate on limited liquidity and resources. However, cash flow issues can bring the operations of an MSME to a grinding halt. So, it is critical for small businesses to effectively manage cash flows and working capital. Working capital loans can serve as a lifeline for these businesses, helping them tide over cash crunches and setbacks. Kinara Capital provides easy access to collateral-free working capital loans for MSMEs, ensuring that they can weather sudden expenses and make the most of opportunities.
FAQs
How do I qualify for a working capital loan?
To qualify for a working capital loan from Kinara, your business has to be a registered entity in the manufacturing, trading or services sector. To check your eligibility, download the myKinara App and take the 1-minute eligibility check.
How long does it take to get approved for a working capital loan?
You can get your loans approved and disbursed in just 24 hours from Kinara Capital.
What are the common causes of a cash crunch?
Limited resources, delayed payments, mismanaged inventory, and unnecessary expenditure are some of the common causes for MSMEs to face cash crunch.
How much can I borrow with a working capital loan?
You can get a working capital loan of up to Rs. 30 lakhs from Kinara Capital.
Are there any restrictions on how I can use a working capital loan?
Working capital loans need to be used for day-to-day expenses or expansion plans of a business, like paying salaries and overheads, expanding product portfolio, improving business premises, etc.
What happens if I can’t repay a working capital loan on time?
Defaulting on loan repayment can attract penalties. Check the terms carefully before applying for a loan.
Is a working capital loan the same as a business line of credit?
A working capital loan provides a lump sum borrowed for short-term operational needs with fixed repayments, while a business line of credit offers revolving access to funds up to a preset limit, allowing borrowing and repayment flexibility.
How can a business improve its cash flow to prevent future cash crunches?
Businesses can work on managing inventory and payments more effectively and focus on priorities when it comes to expenditure in order to prevent cash crunches.
How can a business manage a cash crunch effectively?
Taking a working capital loan is an effective way to manage a cash crunch, as it allows a business to tide over the setback without compromising its own assets and profitability.
