Every business goes through highs and lows of business profits, which affects the repayment of vendors and services. This is where working capital helps; to pay short term loans, day to day expenses, paying off suppliers & vendors etc.
Working capital, also known as net working capital, satisfies everyday operational costs of the firm. Many companies see seasonal surges in profits, which helps them cover for inventory and short term expenses throughout the year. Generating working capital is vital since that keeps the company sustained for a year.
There are several ways a company can generate its working capital. Let’s explore below some of the effective ways to generate net working capital:
Short term financial obligations can be a pain for businesses, especially during the slow down. Most banks are willing to give credit facilities after a thorough evaluation. Keep in mind that you will be charged a fee irrespective of if you use the facility or not.
Venture debt is perfect for start-ups & newcomers. The capital is given on a set percentage on the last equity raised of the company. Usually, a 30% raise. Venture Debt is one of the most flexible ways to generate working capital.
Supply Chain Finance
This method of generating Working Capital is beneficial for all the parties involved. The buyer takes the invoice from the seller and requests credit from the bank. Instead of the general 30 rule of payment, the buyer gets 60 days from the bank.
The buyer pays off the seller on an immediate basis. Supply Chain Finance is perfect when the buyer has a better credit rating.
Bank guarantee works more like security than actual funding. A non-funding method, Bank Guarantee is based on an agreement between the involved parties. If one person breaks any point of the agreement, the other party can revoke the agreement.
The bank charges a fee or a percent from the commission.
This is the best form of loaning for a start-up or an SME with no credit history. This kind of loan, if taken from a very trustworthy source, can be the most practical approach for a company in its nascent stage.
This method of generating capital works best if you have a proven track record of timely repayments. You can always use your confirmed orders to use this method.
You can avail trade credit from your supplier on the basis that you can bring good business. Buy in bulk from your supplier to be offered a trade credit. The supplier may evaluate you.
Apart from the general market methods, always watch out for the other opportunities. Let’s discuss them below.
1.Emergency Credit Line Guarantee Scheme (ECLGS)
In the wake of the COVID-19 pandemic, the Government offered some relief to the MSMEs. As of February 29th 2020, the Government is paying 20% credit of the borrower’s total outstanding credit. The amount can be up to Rs 25 crore.
- Pre-shipment/Post-shipment Finance
Post-shipment finance is extended to the importers as working capital so they can continue handling & selling the goods.
Similarly, pre-shipment finance is provided to the exporters before the release of the shipment so they can carry out the export processes easily.
- SME Listing
Getting listed as an SME can be a great way to attract investors and raising company profile with suppliers, the public, and other financial institutions and provides continuing liquidity to shareholders.
- Finance Minister’s ‘Fund of Funds’ for MSMEs
Finance Minister Nirmala Sitaraman announced a ‘Fund of Funds’ for MSMEs. The fund of funds will operate with a Main fund & Daughter funds. The Government will provide equity funding for MSMEs with potential for growth and viability.