By: Shakti Agrawal, Head – Supply Chain Finance at Capital Float
Financial planning indeed plays a crucial role in business growth, both in the short-term and the long-term. Seasonal spikes, the need to arrange cash for bulk purchase deals, delayed payments on government contracts, margin money requirement to bid new contracts, etc. lead to a cash crunch that prompts channel partners to reach out to financial institutions. But how to assess the cash requirement and find a fitment remains unanswered most of the times. The channel partner may consequently borrow loans at expensive terms, leading to an unnecessarily high-cost EMI burden. Furthermore, this does not address the need for timely funds on the face of an urgent demand for credit.
Given below is a cheat sheet that may help a channel partner accurately identify their needs and choose the optimum type of financing.
Timelines to churn the stock
Often, channel partners are compelled to avail a term loan for a duration of 12 months to 3 years since the lender offers a singular loan product. This results in channel partners purchasing the stock and churning it consistently throughout the tenure of the loan. However, they may not always be successful in matching the EMI commitment on the loan owing to a repayment timeline that stretches beyond the duration required to repay the loan. Missing due dates, cash blocked in some other contracts, routing of funds into other business lines, etc. are scenarios that many channel partners may have often come across.
The best way to overcome such situations is by paying ‘on the go’ as and when the stock is sold. Estimating the stock sale timelines and opting for a flexible repayment credit line allows you to maintain healthy cash-flow and discipline in serving repayments.
Measure business liquidity
There is always the possibility that even a profitable SME can run into cash flow problems, regardless of the numbers reflected on its books. Delays in receivables have hurt many a lucrative business, and are, in fact, a common cause for cash flow mismatches. In such cases, measuring the liquidity of the business can be very useful for an SME in order to find an alternative way to mitigate problems that arise from a cash crunch. The proper evaluation of liquidity can be extremely beneficial and can be done in two ways:
It shows the capability of a business in covering current liabilities with current assets with the formula:
Quick Ratio= (Current Assets – Inventory)/ Current Liabilities
It is measured by calculating the difference between the current assets and current liabilities, with the formula:
Working Capital = Current Assets – Current Liabilities
Getting these figures in hand can help measure business solvency, and thus available funds can be duly channelized and prioritized.
De-risk your channel
For channel partners, it is integral to invest time and money to standardize receivable cycle and ensure that their customers pay on time, given there are significant costs involved in on-ground collections. This further causes delays in payments, leading to overall cash realization getting stretched. Currently, this credit gap gets funded either by extending suppliers payment or borrowing from financial institutions.
However, very few channel partners have explored the possibility of outsourcing this activity to a lender. New-age NBFCs perform this function by offering channel financing programs wherein lenders provide a loan to customers and channel partners get their cash up front. Here, lenders manage the risk of collection, and with the support from channel partners through Stop Supply Arrangement, ensure discipline in repayments from their customers.
Ensure you don’t end up overstocking
Landing in a situation where cash discounts/bulk discounts are so lucrative that you have a higher estimation of loan requirements and not being able to sell the stock leads to a risk of overstocking. Ideally, a channel partner should aim at lending lines which cover up to 50% of their monthly purchases, thereby giving them enough room to grow their business by 30-50% annually. Having a low and grow strategy always helps in managing the risk of downturn and sudden cash burn.
Explore online loans
Thanks to digitalization, business credit can now be obtained online from digital non-banking entities commonly known as FinTech lenders. While availing loans from these new-age financiers, a great deal of paperwork requirement is instantly eliminated, with the added benefit of customizing the amount, tenure and repayment mode of finance. The huge advantage lies in not necessarily having to offer your personal or business assets as collateral. Provided you can find the right lender that finances the unique needs of channels partners, online loans can be applied for any time, from anywhere and you can receive funds in your bank account in a matter of days.
Maintain healthy track record to bargain better rates
It pays to maintain a good credit score, in more ways than one. For starters, it can help you bargain for lower interest rates on short-term business loans. Also, a high score for your business from credit rating agencies such as CIBIL creates room for tapping into other means of raising money, such as getting into partnerships or availing finance from non-traditional lenders.
On several occasions, the lender may analyze your business and your personal debt load, in addition to your credit score. If any of these is already high, the lender may hesitate to extend or provide fresh credit for your business. Therefore, it is important to keep a tight rein over your credit utilization, so that the services offered by the lender are not affected by your credit score.