Working capital acquisition strategies for startup business entrepreneurs
Often, many new entrepreneurs need working capital for day-to-day operations, to repay short-term debt, even to plan for future growth. A positive working capital means that the firm has more current assets and fewer current liabilities. And a healthy working capital shows that it has enough cash to pay for operational expenses and short-term liabilities.
If you own a newly-launched business, you must ensure that your working capital remains healthy to meet your obligations to employees, vendors, and the taxman – while ensuring an overall healthy cashflow for the future. However, you may be feeling anxious that your working capital is on its last legs. This article will help alleviate your anxiety by exploring many sources of working capital for your business. This knowledge will prepare you for those rainy days where you suddenly find yourself in need of funds.
Where you can get working capital for your new business
Here are some sources to access working capital to meet your short-term operating expenses and debt obligations:
Business loans
A business loan is a popular way to raise working capital for both new and existing businesses. It is a form of a bilateral lending agreement between the borrower (you) and a lender that be either a bank or a non-banking financial company (NBFC).
As part of the agreement, the lender gives a specific amount of money to the borrower who is then obligated to repay it with interest per a predetermined schedule and within a predetermined period. The period is known as the loan tenure. The regular repayment amounts are known as Equated Monthly Installments (EMIs).
The interest rate, loan amount, EMI amount and schedule, tenure, and other terms and conditions differ by different lenders so you should always do your research before settling on a lender and loan product for your new business' working capital requirements.
Personal loans
You can also apply for a personal loan to meet your working capital needs. It's often easier to get a personal loan instead of a business loan if your company does not yet have an
established credit history. Plus, personal loans are generally unsecured so you can still get the loan if you cannot provide a collateral.
However, the lending limits are usually lower and interest rates are generally higher. You may also have to provide a personal guarantee so if your business defaults, your personal credit will take a hit.
Business credit card
A business credit card allows new businesses to access small amounts of short-term working capital to make salary payments, fund essential purchases, etc. You can also use the card to fill cashflow gaps and for emergency business expenses.
Like a personal credit card, a business credit card allows you to draw on a line of credit (LOC). However, the LOC is higher LOC than the LOC offered by a personal card. With most business cards, you won't be charged interest if you pay your entire bill in full before the due date. Some issuers also offer extended interest-free financing periods, so you get some flexibility to pay your balance and control your cashflow.
A business card separates professional and personal expenses so you can better maintain and control your accounts and prepare your tax returns without falling foul of regulators.
Additionally, if you always pay your liabilities on time, your company can build credit which can improve your chances of getting a loan in the future.
Business line of credit
A business LOC is a type of "revolving" loan that's like a hybrid of a regular loan and a business credit card. You can access funding up to a certain limit. Like a loan, you pay interest on the amount borrowed. And like a credit card, you get a flexible form of financing wherein you only pay interest on the amount you actually borrow.
Until the limit is reached, you can continue to draw on the LOC to meet your ongoing working capital requirements. You can then repay the amount owed immediately or over a time period you pre-agreed with the lender. The sanctioned amount and limit would depend on your credit history and whether you are able to provide a collateral or not.
Like a business credit card, maintaining a LOC in good standing can improve your business' credit rating and also increase the chances of getting future financing from a bank or NBFC.
Angel investors
In FY2020, Indian start-ups secured 341 investment deals with angel investors. In comparison, there were 256 and 275 such deals in FY2018 and FY2019, respectively. Clearly, angel investors have an appetite for investing in new businesses in India.
An angel investor is a high-net worth individual (or group of individuals) who provides financial assistance to new businesses in exchange for a share of ownership, typically as
equity. Many angel investors also provide consulting services and management support to small companies.
When approaching an angel investor, it's important to create a professional and detailed pitch that clearly illustrates your financials, competitive landscape, value proposition, industry challenges, and expansion plans.
Conclusion
As of 2022, over 75K+ startups exist in India. This shows that the country's startup ecosystem is flourishing. Small business owners like you have many opportunities to grow and succeed, thanks to a booming middle class, tax incentives, and evolving regulatory. And as we have seen above, you also have many options to secure working capital.
But if none of these options work for you, consider partnering with FinTech firms like CredAble and Upscale. They bring you advanced financial expertise and technological know-how to help new businesses raise working capital. If you want to connect with more lenders and access funds without the hassle typically associated with traditional lenders, talk to us!
Think Working Capital, Think CredAble!
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