{"id":2848,"date":"2019-04-10T11:24:20","date_gmt":"2019-04-10T11:24:20","guid":{"rendered":"https:\/\/blog.kredx.com\/?p=2848"},"modified":"2023-10-26T06:00:32","modified_gmt":"2023-10-26T06:00:32","slug":"how-to-align-your-business-better-to-overcome-working-capital-issues","status":"publish","type":"post","link":"https:\/\/www.kredx.com\/blog\/how-to-align-your-business-better-to-overcome-working-capital-issues\/","title":{"rendered":"How to align your business better to overcome working capital issues?"},"content":{"rendered":"<p><span style=\"font-weight: 400;\"><iframe src=\"https:\/\/w.soundcloud.com\/player\/?url=https%3A\/\/api.soundcloud.com\/tracks\/878929870%3Fsecret_token%3Ds-2b9mHnyjJuK&amp;color=%23ff5500&amp;inverse=false&amp;auto_play=true&amp;show_user=true\" width=\"100%\" height=\"20\" frameborder=\"no\" scrolling=\"no\"><\/iframe>In our previous blog, we covered what is working capital and how to identify the need for it. \u00a0Here, we will be discussing how to bridge the working capital gap with the help of some winning tactics.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">We believe that \u2018<\/span><a href=\"https:\/\/www.kredx.com\/what-is-working-capital\/\"><span style=\"font-weight: 400;\">Working Capital Gap<\/span><\/a><span style=\"font-weight: 400;\">\u2019 should not be a showstopper in the current business model and hence, we need to figure out the right, viable solution which aligns with business needs. We would want to put forth some of the feasible options to overcome this \u2018gap\u2019 in the existing business setup.<\/span><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\"> \u00a0\u00a0Cash Discount (CD) \u2013 The Percentage of Discount, a vendor\/seller, has to let go to the customer for selling their goods and services, against which they can avail instant credit for the same<\/span><\/li>\n<\/ul>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Price of goods\/services and credit period for one to receive funds are mostly decided by financially strong parties, between buyer and seller, and by unique\/less competitive goods\/services being traded.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The buyer&#8217;s financial strength determines whether they want to offer a CD or not.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">CD mainly is a revenue-making strategy of the buyer as it adds up to the bottom line of the buyer. \u00a0\u00a0\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Opting for CD exposes the seller\u2019s weak financial strength to the buyer and hence is not widely accepted by the seller\/vendor.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">CD makes the cost of liquidity one-sided and in most cases is high, in spite of being the easiest and fastest way of getting cash by a seller\/vendor.<\/span><\/li>\n<\/ul>\n<h2><a href=\"https:\/\/www2.deloitte.com\/sk\/en\/pages\/finance\/solutions\/working-capital-optimization.html\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">Working Capital Limit<\/span><\/a><span style=\"font-weight: 400;\"> from financial institutions<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The existing financial system has failed to address the working capital GAP of business communities, especially SMEs and businesses in the service industry mostly due to:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Proven track records a must<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Profitability is no compromise<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A too technical and traditional approach to risk evaluation<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Believes only in a business where there are underlying goods manufactured or traded<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Very limited good rated large companies are exposed to banking limits in the service sector<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Additional Collateral like Land and Building, FD as margin, Plant and Machinery, Hypothecation of stock and Book debts, Creation of charge in ROC<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Despite making the exposure so secured it has been unfavourable for growth-seeking companies<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Unsecured limits are available from new-age NBFC\u2019s, but it\u2019s too small for the entire need<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Time taken is too long to set the limits<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Operational activities and cost is too high to use the limit<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Sellers\/Vendors are left with no choice of going to multiple options with multiple financiers leading to spoiling the credit quality and adding to the huge amount of indirect cost which never gets measured other than the actual borrowing costs<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Impacts the balance sheet due to the bulgy loan book impacting the rating<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">To understand it better, let us pick a real-life instance. A week ago, we met with a company which is a pioneer in supplying important products and technology to world-renowned blue-chip companies. The company relies upon financial institutions to meet the working capital needs which need hefty collaterals to sanction any credit amount. <\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Digging in deeper, we observed a few things about the company<\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The company has been in the market from 5 years and is growing 5X year on year<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The company has signed long term contracts to supply state of the art product to the industry\u2019s leading companies<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The company holds a strong balance sheet and hence, was able to raise the credit of Rs18 crore from various financial institutions. <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">In the process of raising this credit amount, the company had to keep a lot of collaterals like <\/span>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Mortgaged property of 30cr<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Hypothecation of stocks and book debts<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Creation of change in ROC<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Personal guarantee of Directors\/Promoters<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Bank has spread the limit of 18Cr across OD, Pre-shipment finance and post-shipment finance<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-weight: 400;\">What other approaches could the company take?<\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">In the case of Mortgage of property, it is advisable to go for LAP instead of credit against \u00a0OD\/CC, pre-shipment finance and post-shipment finance.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">If a company opts for LAP, its stocks and book debts will remain free to search for working capital from other alternatives. <\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Businesses are on the lookout and in desperate need of an alternate way of accessing liquidity with no collateral. The option should be completely un-secure and aid in nurturing the seasonal, permanent business prospects. If the structure is off-balance sheet then it acts as an icing on the cake. Cost is a significant factor and hence must be justified with less operational activity. The above parameters are an excellent substitute for businesses waiting for such avenues to access working and <a href=\"https:\/\/www.kredx.com\/growth-capital\/\">growth capital<\/a>.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">We believe that if a seller\/vendor is supplying goods\/services to sizeable companies with excellent credit rating, then such seller\/vendor deserves to get liquidity against unpaid receivables from such blue-chip companies completely unsecured. This shall bridge the current gap of receivables from such blue-chip companies and meeting the futuristic gap too beforehand when the need arises.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Receivables from Blue-chip companies are good assets to have in the balance sheet and deserve faster liquidity against such receivables with no additional strings attached other than the debtor against which the cash has been sort for.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">You can read more about how all this can be achieved and why one should not lose liquidity only due to cost in our next blog \u2018<\/span><span style=\"font-weight: 400;\">How to identify the right price to unlock liquidity?\u2019<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In our previous blog, we covered what is working capital and how to identify the need for it. \u00a0Here, we will be discussing how to bridge the working capital gap with the help of some winning tactics. We believe that \u2018Working Capital Gap\u2019 should not be a showstopper in the current business model and hence, [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":5857,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[35],"tags":[338,339,340,181,341,342,323,343],"class_list":["post-2848","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business","tag-blue-chip-companies","tag-business-model","tag-cash-discount","tag-financial-institutions","tag-goods-and-services","tag-lap","tag-working-capital-gap","tag-working-capital-limit"],"_links":{"self":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts\/2848","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/comments?post=2848"}],"version-history":[{"count":1,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts\/2848\/revisions"}],"predecessor-version":[{"id":13872,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/posts\/2848\/revisions\/13872"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/media\/5857"}],"wp:attachment":[{"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/media?parent=2848"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/categories?post=2848"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.kredx.com\/blog\/wp-json\/wp\/v2\/tags?post=2848"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}