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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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The nature of business is never the same. While you could be earning huge profits, enabling you to run your business smoothly, there could also be a time when your business revenue is insufficient to meet immediate expenses. Especially, if your company runs on credit, there could be days when you do not have sufficient liquidity to meet the short-term obligations and that could hamper your revenue and profits. In such a situation, exploring credit options for working capital can help you. Such short-term credit can help mitigate the cash crunch by providing necessary funds when needed. If you are looking forward to availing credit for meeting your working capital requirements, here are five options you can explore.
1. Bank overdraft
In bank overdrafts, you can withdraw more than what is deposited in your account. You can pay the interest on the amount you overdraw and not on the entire overdraft limit sanctioned to you by your bank. Usually, this facility is available for current account holders who have a sizable deposit and a good relationship with the bank. It is the easiest working capital financing option and is often opted for by small and large businesses alike.
2. Bill discounting
Bill discounting is one of the best ways to arrange working capital for businesses that run on credit. You need to present the invoice or bill drawn on customers to the bank and avail funds against it. The bank purchases the invoice and pays the bill amount after deducting a small amount as commission. At the end of the credit period, the bank then presents the bill to the customer and collects the bill amount from them. It is a crucial financing method that can help businesses bridge the gap between the sale date and the receipt of payment.
3. Bank guarantee
In this type of working capital loan, the bank assures the vendor that if the buyer fails to pay the amount, the bank will cover the amount. The seller usually opts for such an arrangement to decrease the risk of loss due to the non-performance of the agreed undertaking, which can be the payment of dues in this case. Banks usually ask for some collateral and charge a commission for such an arrangement. Similarly, a letter of credit is used for international trade where the exporter and importer are unknown to each other.
4. Trade credit
You can avail a trade credit from your supplier. Usually, for trade credit, suppliers would consider your creditworthiness and review your profit records, liquidity situation, and payment record. Here, your relationship with the supplier and business goodwill also factor in.
5. Working capital loan
You can avail a working capital loan from a bank or financial institution at flexible repayment terms. Usually, there are various types of working capital that you can choose as per your business needs. Working capital loans for small businesses can help you manage your short-term needs like payment of wages, mortgages, rent, inventory, etc.
Depending on your business needs and feasibility, you can opt for any of the above working capital finance options. However, take your time to go over all the terms and conditions of such credit and ensure that the cost of borrowing or the interest is something your business can afford without hampering profits.
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