Small Business Challenges and How Working Capital Helps
The SME sector has to undergo several challenges with regards to business funding. The need for quick finance to conduct daily operations and the difficulty in availing business loan are roadblocks in the growth of the small business.
The biggest challenge that small business units’ face is the shortage of working capital. Traditional banking channels are either reluctant to lend or stipulate stringent eligibility conditions for SMEs, with the insistence of collateral cover even to extend working capital loan.
Further, the loan approval process involves extensive paperwork, spanning over a prolonged time, which can prove disastrous to the survival of the small business. Sometimes, after several long months of wait and submission of the documentation, they are faced with the disappointment of loan rejection. Hence, sometimes they succumb to a debt trap after approaching unorganized moneylenders, charging exorbitant interest rates. This bleeds the small business and may even result in the eventual, forced shutdown of the small business.
Working capital is essential for the smooth functioning of a small business. Working capital finds application in raw material purchases, payment to suppliers, wage payment and other short term operational requirements. The main reasons for working capital being so critical are:
- Going concern status: Working capital facilitates business operations and helps fund all short-run operational expenses like payment of labor wages, purchase of raw materials, meet overhead costs etc. Such expenses are vital to the existence of a business and cannot be postponed. Hence urgent liquidity needs which are met by working capital loans will ensure business continuity and solvency.
- Goodwill generation: A business that meets its internal and external liabilities on time i.e. payment to laborers and suppliers will generate goodwill. This will cause the business to prosper.
- Continuous production: Prompt and timely payments ensure regular supply of raw materials. This is critical for continuous production to take place. Many times, raw material suppliers are reluctant to do business with small business and offer unfavorable credit terms. If one settles the payables on time, it would go a long way in ensuring a more lenient credit period from the suppliers, from the good business rapport. In case of a disruption in the supply chain, the business would be unable to produce goods, which would adversely impact sales. This may impair the ability to pay the employees on time.
- Tide over a sudden cash requirement: Working capital provides the much-needed confidence to the business to overcome any financial difficulties or funds paucity in the short run. Some small business units face unforeseen events like an order cancellation, damage of raw materials due to bad weather, a sudden legal suit or unavailability of a component which causes production to slow down etc. In such cases, a comfortable cash buffer will provide the liquidity to tide over such situations. Cash is truly king when it comes to sudden exigencies. The working capital loan provides a flexible funding option for the small business.
Ideally, small business units need working capital finance serviced by technology. This enables access to working capital without extensive documentation, swift processing, an absence of collateral requirement and online application and approval. This saves SMEs considerable time and resources which can be fruitfully allocated towards discharge of business operations. Fintech companies have enabled simplification of working capital loan for small business.
The FinTech segment has transformed the working capital financing space by harnessing new-age technology right from start to end i.e. loan application, underwriting and sanction process.
SMEs are the backbone of the Indian economy. The Fintech revolution, along with the favorable Government policies has helped create an ecosystem, whereby the small business units can survive and thrive. This is possible because of the speedy disbursement of the business loan for working capital needs.