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.
08 MARCH, 2021
Access to working capital at the right time can play a significant role in shaping business outcomes, with a clear impact on day-to-day operations. The ability to meet financial obligations and requirements effectively can help businesses achieve higher revenues. Business owners have their task cut out when working out the right strategy and identifying ideal financial products for better business outcomes.
With businesses around the world inching back to normalcy, there’s a clear need for better working capital management. Here are some perfectly matched options to help businesses manage working capital effectively to meet the twin objectives of liquidity and profitability.
Expanding your business? Ensure that you have funds for increased demand
A business may have expanded to reach a wider customer base, but a lack of funds at a critical time could be a major setback. While there is a clear need for capital, raising funds at high interest rates can affect profitability. But multiple working capital financing options offer businesses timely access to funds, without any impact on profitability.
A hardware business that has supplied materials to a real estate developer will typically have to wait for 4-6 weeks for the invoice to be processed. With invoice financing, businesses can raise amounts that are equal to the unpaid invoices, and use this as working capital to meet other needs.
A business that procures raw material or products from a seller may not have the necessary funds for procurement. Simple options such as a domestic letter of credit (LC) allow a business to place orders with a seller against the domestic LC, which the bank honours on the conclusion of the sale. This keeps the supply rolling without requiring the business to raise funds at high interest rates.
Sudden cash crunch in operations? Short-term solutions help tide over liquidity crises
Liquidity issues are not uncommon to businesses. Delayed payments, expansion plans, a sudden increase in costs of input materials, or unforeseen circumstances (such as the ongoing pandemic) can put businesses in a tough financial spot. Companies can make smart decisions by quickly availing demand and short-term loans. Common perceptions about such loans – that repayment options are rigid – are usually incorrect.
A typical retail store or supermarket plans operational requirements based on expectations of payments and pay outs. However, there could be a sudden hike in input costs, or overheads may have increased, making it necessary to raise funds quickly. With demand and short-term loans, businesses can raise funds through flexible repayment options. For instance, the store may expect to encash a cheque from a bulk purchase around a particular week or expect staggered payments from corporate customers, and the repayment can be scheduled around the expected payments.
In need of working capital with longer repayment tenure? Look at flexible term loans
Businesses often find the need for funding with a long-term repayment option. For instance, a business may have relied on short-term funding for investments, when the correct option should have been long-term funding. With a working capital term loan, businesses can avail the necessary funds to manage requirements with comfortably spaced long-term repayment options.
A small restaurant or retail outlet may have opened at another location, and this would require funding without affecting the operations of the original outlet. This phase of growth and consolidation is important, and a short-term repayment option may not be the right choice in this scenario. It is necessary to choose products that permit repayment over a period of 5-7 years with an option to foreclose earlier, depending on the availability of funds. A working capital term loan is an ideal choice as it can facilitate operations and expansion without bringing along crippling liabilities.
Unable to honour payments or make pay outs? Choose simple overdraft facilities
Though businesses have streamlined finances and operations, there could be situations where a business is unable to honour payments. It may be necessary to raise funds to ensure that pay outs are made in time. Tyre shops and service centres, for instance, may need to procure inventory on time to ensure that required stocks are available. It is necessary to ensure that cheques issued to the stockist don’t bounce, or that cards are not declined.
Cash credit and overdraft facilities are excellent options that can help a business tide over a cash crunch. Overdraft and credit are flexible options with lower interest rates that permit businesses to meet expenses easily. Banks offer staggered release of funds, which effectively ensures that the business receives funds on time, with interest exposure limited to the actual release of funds.
The biggest problem for businesses is often the lack of funds at the right time. A business may have excellent core expertise, the best employees, the right assets, and a finely tuned business model. But the inability to access funds can deal a severe blow to operations and ruin even the best strategies.
Working Capital Finance from Kotak Mahindra Bank is a special combination of offerings designed to meet the needs of businesses that require uncomplicated, straightforward financing. Multiple flexible and custom solutions – cash credit and overdraft, demand and short-term loans, working capital term loan, and supply chain finance –allow businesses to access financing options free of complex clauses and conditions. Flexible options, lower interest rates, dedicated support teams, and swift release of funds make these options ideal solutions for businesses that wish to improve business outcomes and profitability.
This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. and its employees. We make 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 does not constitute legal advice. Kotak Mahindra Bank, its employees and the contributors are not responsible or liable for any damage or loss resulting from reliance on or use of any information contained herein. Credit at the sole discretion of Kotak Mahindra Bank Ltd and subject to guidelines issued by RBI from time to time. Bank may engage the services of marketing agents for the purpose of sourcing loans.
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