Cash flow can be defined as the total amount of money moving into and out of a business. Cash flow management can have a significant positive impact on the financial health of a company. Every business, big or small, should regulate its cash flow for its seamless operation.
However, MSMEs (Micro, Small, and Medium Enterprises) have to be particularly careful about regulating cash flow to prevent a shortage of cash. This is because a small business cannot afford to spend more than it gains.
To be classified as an MSME and to be eligible for a loan for MSME, a business must fulfill the following conditions:
To qualify as a micro-enterprise, the total investment should be less than 1 crore and the annual turnover should be less than 5 crores.
To qualify as a small enterprise, the total investment should be less than 10 crores and the annual turnover less than 50 crores.
To qualify as a medium enterprise, the total investment should be less than 50 crores and the annual turnover less than 250 crores.
For short-term financial emergencies like employee wage payment and inventory management, an MSME can avail of a working capital loan. The working capital loan is a type of business loan that small or medium businesses can avail to finance their day-to-day operations. Such a loan will tide you through the temporary cash-flow shortage.
Why do MSMEs face problems in availing a business loan?
The factors that contribute towards a small business’s limited access to business loans are as follows:
- Information asymmetry – Information asymmetry occurs when one party in an economic transaction has more knowledge than the other. Most MSMEs in India are informal in nature and operate in relatively unfamiliar sectors. That exposes them to higher information asymmetry and risk of failure. As a result, banks hesitate to give loans to MSMEs.
- Absence of relevant documents – Very few MSMEs have enough assets to present as collateral. Furthermore, banks that provide loans for MSME require important documents like certificates of incorporation. Therefore, in case of the absence of documentation, banks would be reluctant to offer loans to such businesses.
- Inefficiencies in processing: Most MSMEs use manual processes to fulfill their day-to-day operations which can incur costs and lead to unnecessary expenses. These inefficiencies, in turn, can negatively affect cash flow and recordkeeping that can cause problems in availing the loan for MSME.
- Common perception as low-return enterprises: As compared to large corporate companies, most banks and financial institutions view the MSMEs as a low-return sector. Hence, fearing insufficient returns, most loan-providing institutions don’t lend money to these enterprises.
Lack of access to formal credit due to the above-mentioned factors has forced MSME owners to obtain funds from informal lenders, including friends and family.
This is an unfortunate circumstance not only for the owners of small businesses but also for society, as a whole. Because even if informal lending is easy to access, the interest rate can range from 3-10% per month.
That is where a working capital loan can help immensely.
Features of a working capital loan
Here are some of the notable features of the loan:
- Short term:
Generally, working capital loans are for a short period of time that can range from six months to three years. However, the tenure of the loan depends upon the financial institution that is lending money.
- Smaller loans:
These loans offer smaller amounts of money than term loans. The loan amount is variable for different financial institutions. Some companies can even provide working capital loans of up to 2 crores.
- Quick processing:
Time is an asset in the case of working capital loans. Most MSMEs require a loan that is processed within a couple of days. Working capital loans can be expended within 2-3 days.
- Online mode of application and processing:
Nowadays, most financial institutions provide online modes of loan application and processing. This means that MSME owners won’t have to wait in long queues to apply for their loans.
- No collateral required:
Generally, working capital loans are not secured. This is quite a significant feature for small business owners who do not own any assets.
- Satisfactory interest rates:
Working capital loans have minimal interest rates. Actual interest rates depend on the lending financial institution and the borrower’s credit rating.
- No hidden costs:
No hidden charges or costs apply in the case of working capital loans. They only require a one-time processing charge.
- Adaptable repayment:
Working capital loan borrowers can apply for flexible repayment depending on their financial status. Moreover, there is also a provision to forestall the loan at any specific time, provided the first EMI is paid. That would incur no additional fees.
How to analyze the cash flow of your MSME
The first thing that you should note here is that a company’s cash flow and profit statement are not interrelated. Cash flow is, however, directly related to the working capital of a company. It can also vary on the basis of the following factors:
- Break-even Analysis
While profits and cash flow are not related, it is necessary to understand the break-even point in your business. The break-even amount should be your primary financial goal. After your MSME makes its first profit, cash flow can be managed more efficiently.
- Quarterly Assessment
As far as businesses are concerned, cash is the most crucial aspect. Moreover, cash becomes even more crucial in the case of MSMEs. Every quarter passes through your accounts register.
Through quarterly assessment, you should analyze the departments where most of the cash is spent. Take a closer look at your inventory as maintaining unnecessary inventory can drain your cash significantly.
- Accelerating the Recovery Process
If you are an MSME based in India, you need to put in extra effort to make sure that you recover your money. That can include streamlining the process of settlement of all pending bills.
Unpaid bills can cause your small business to suffer financially. Hence, you should always make sure that your clients pay adequate bills.
How do financial institutions assist MSMEs in controlling cash flow?
Owners of MSMEs need to generate as much awareness for their business as possible. The increased revenue generated as a result of brand awareness can be utilized for the growth and expansion of their small business.
If your MSME is in its starting stage, managing cash flow can be quite a challenging task. Financial institutions providing business loans like the working capital loan can be of huge help in this regard.
At Ziploan you can avail of an instant loan at the most competitive interest rate to help you take your business to the next level. To know more about our loan facility, feel free to call us at 011 – 4310 – 9577.