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3 Types of Business Loans To Look Out For If You Are An Entrepreneur

It is said that a business must secure funds before it even needs them. This money could come in the form of investor funding and several types of business loans for small and medium sized-businesses to meet unexpected and expected, dynamic and static demands of the business. 

This gravity and importance of the above saying can also be understood with a popular Japanese proverb — “If you can see three days ahead, you will be rich for three thousand years.” It means if you can plan well ahead for the future, you will be able to focus more on the present. 

Business loans for small and medium-sized businesses are something that is in the periphery of cash flow in a business. If a business is looking for growth, it needs to have its cash flow, sorted. If a business is to save itself from the verge of collapsing, it needs to sort its cash flow and to do that one of the most efficient instruments is business loans.    

There are several types of business loans a business can secure but here we will discuss three of them that are most favourable to a small and medium-sized business. 

1. Working Capital Business Loan 

2. Buy Now Pay Later

3. Sales Invoice Discounting

1. Working capital business loan

As the name itself suggests, a working capital business loan is availed to keep the boat floating. It is used to fund the day-to-day operations of a business such as accounts payable,  employees’ wages, purchase of raw materials, etc and therefore, helps overcome the shortage of cash, if any. 

It ensures that the business operations are functioning properly and fulfilling short-term financial obligations irrespective of other financial business needs such as asset purchase or expansion plans.   

This type of business loan is often preferred by businesses that are seasonal in nature. Wholesalers, service providers, retailers, manufacturers, and traders count for the biggest number of applicants for working capital business loans.

When applying, keep these features of working capital business loans in mind:  

Collateral requirement: For a working capital business loan, your bank may or may not require you to provide collateral to avail the loan. If secured, then collateral such as property could be taken into consideration and if unsecured then your business financial statements, tax returns, etc could be considered. 

Loan duration: In this type of loan, the tenure may vary from anywhere between 6 months to 48 months. 

The loan amount and interest rate: The loan amount shall depend on the business requirements and your business eligibility. The interest rate varies from bank to bank.  

Here are some of the working capital financing options available for businesses:

Bank Overdraft

In this type of financing, a borrower is approved a certain limit of credit that shall not be exceeded. Here the interest is charged on the amount of cash used and not at the total approved amount. 

Trade credit

In this type of financing, profit records, payment records, etc are taken into consideration while approving the loan.

Invoice Factoring

In this type of financing, businesses sell their invoices to a third party at a discount who thereon  can additionally collect the amount from the debtors.

2. Buy Now Pay Later

You can choose to opt for the opt ‘Buy Now Pay Later’ loan type if you are looking forward to increasing your purchasing power without having to pay from your own pocket. To make this happen, you can sign up with a company with such services that would act as the lender. 

Herein, you will make the purchase and the other company will pay on your behalf. Later you will have to pay the amount in a lump sum or in EMIs back to the lender in a stipulated period of time.  

This type of business loan allows small and medium-sized businesses to have quicker and easier access to money. 

The advancement of technology and refined government schemes have made it possible for businesses to cut through the tedious and time-consuming processes wherein earlier a borrower had to have a high credit score, submit a lot of documents, ensure enough collateral, etc. 

3. Sales Invoice Discounting

Sales invoice discounting is a financial method that allows small business owners and entrepreneurs access to business credit with their unpaid invoices. This way business owners can raise capital by collateralizing their client-approved invoices.

To learn more about it, read - The ultimate guide to cash flow management

Most of the above loan types fall into the category of Unsecured loan. Let’s learn a thing or two about them. 

Unsecured Loans

An unsecured business loan is suitable for businesses that do not have any assets such as property to put up as collateral against the loan. An unsecured loan can be availed against credit score, financial documents, etc.

Some intricacies to remember while applying for an unsecured loan

-Your credit score and personal assets could be asked by some lenders and thereby put on the line.   

-Unsecured loans are not limited to banks alone but many Non-Banking Financial Companies have entered the market that acts as the alternative medium. 

-You do not always have to have a perfect credit score as the loan approval process varies from bank to bank. Although, a good credit score does make the way easier in most cases. 

With UpScale’s fully digital, quick 2-steps and quick 3-steps process, small businesses can apply for loans under INR 10 lakhs and loans over INR 10 lakhs, respectively. You won’t be asked to upload any documents but only add your credit score and share your GST number or bank statements to apply for the loan. 

Conclusion

Most small businesses face the challenge of getting adequate finances, thus, we’ve listed down the three types of business loans that one needs in order to grow their business. 

When you own a business, you need to understand your options in order to tailor your application to the type of loan you need and be clear about how you will use the funds.

There are many myths concerning business loans that make small and medium-sized enterprises, entrepreneurs, traders hesitant when applying for a business loan. A proper understanding of the business financing options available in the market is very crucial for its survival and growth. 

With UpScale, you can set up your business on an upward growth trajectory by exploring and availing options such as working capital term loans, buy now pay later, and sales invoice discounting to cover your working capital needs.    

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Cash Flow Management Tips to Grow Your Business

Many kingdoms, businesses, and people have come and gone from this planet but there is one major thing that has remained constant in the success and failure of these entities, which is cash flow! It’s the story of how well someone manages money. If you have learned it well, you will thrive and if you haven’t, you will falter. 

Now, success and failure are subjective and vary from person to person but when it comes to an organization or a corporation, it becomes a group of people who are there to make good money. When that happens then this complex system behaves much like an organism.

Therefore, one could say that an organization is much like a constantly changing living organism. To keep an organism healthy, you need uninterrupted blood flow to the heart, similarly, to keep an organization thriving, you need a proper supply of cash flow in place.

Before we dive deeper, let’s surf the waters near the shore        

Cash flow is the cash or its equivalent that’s coming into and going out of your small business. If the net of this is positive then it means that the cash that is coming in from customers and clients is more than the amount going out for expenses. If the net is negative, then your business could be in trouble.   

Remember, 82% of small businesses face cash flow management problems. If you fail to manage your cash flow within the first year, you might not survive past the second year. 

To tighten your grasp on the subject and to get a holistic idea of the concept, you can go through our earlier blog- The ultimate guide to cash flow management.

Now cash flow management is basically about improving your receivables, managing payables, and surviving shortfalls. These same parameters also help you make your monthly or even weekly cash flow analysis. Here are a few important tips that would help you sail through the turbulent times - 

1) Measure cash flow regularly 

Use a free cash flow worksheet template to keep a tab on the cash coming in and going out of your business or make use of free accounting software like Wave or GnuCash. Repeat this process monthly and if you can, do it weekly. In a matter of a few repetitions, cash flow analysis will feel like second nature. 

2) Get paid on time

One of the best practices for your business would be to train your customers to pay you on time. Reduce the friction by one-click payment options and automate payment reminders with online invoicing software like Invoice Ninja or Due. 

3) Keep your cash working

The longer the payment cycle you can negotiate with your supplier, the longer your cash is available and earning interest. Remember to keep your cash in an immediate-access account and not where there is a locking period CD bond of a 30-days or 60-days.

Though the breakeven point is a different story from cash flow analysis, it still gives you an idea of how long it will take you to reach profitability. Negative profits and negative cash flow is the recipe for an ugly situation in business.  

You can determine the breakeven point by either doing a unit-based or Rupee-based breakeven analysis. Revenue per item sold, the variable costs for each item and fixed costs like rent or utility bills should be used while determining the breakeven point.

5) Be smart with your payroll

Have a payroll account and transfer the funds just before paying salaries. This way your cash stays in an interest-earning account for a longer period of time. Another tip is to run the payroll on a bi-monthly cycle instead of a bi-weekly basis, saving you the admin cost for extra two cycles. 

6) Manage your inventory better

If possible, have complete control over the manufacturing process by incorporating models like Just-in-Time Inventory management and tools that could help free up cash involved in the tangible objects.

7) Tighten your credit requirements

As most financial institutes do, tighten your credit requirements when offering credit to the customers. Look for a reference check for potential falters with the help of local vendors or go for a full report on your clients with the help of major consultancies. 

8) Securing loans

To prepare yourself for the negative cash flow crisis apply for Working Capital Term Loans to fulfil short-term operational needs. For immediate injection of cash, consider invoice funding, invoice factoring, or sales invoice discounting. Opt for microfinance such as Buy Now Pay Later that offers flexibility in terms of the payment schedule and a lack of formal credit.

9) Get creative with incentives to customers 

It’s a no-brainer in business to boost sales by offering creative incentives to customers. You can choose to sponsor a contest or host an appreciation event. Whatever you do, remember that while increasing sales you have actual cash and not just credit in your accounts receivables.

10) Automate your recurring payments 

Set up automatic payments for periodically occurring fixed costs in your business and make use of accounting software to track cash flow across each month. It’s wiser to spread your expenses across multiple dates rather than paying it in a lump sum. 

11) Be smart with cash outflow

Prefer leasing over purchasing expensive equipment. Barter your way through with customers who are also your suppliers. Go for reconditioned equipment that is in good condition and would work just fine with proper maintenance.   

12) Designate a cash flow monitor

If you can have a qualified and trusted person who can keep a check on your cash flow on a monthly or weekly basis then you will be free to focus more on running your business than worrying about one aspect of it. 

A few more things to keep in mind to better manage cash flow - 

1) Maintain a cash reserve 

Remember to always maintain three to six months of working capital to manage any unexpected crisis. A client who doesn’t pay till a sudden emergency date could put you in a troublesome situation. 

2) Get your pricing right 

If you charge less than the market price, you will be underselling yourself. If you charge too much, you might scare off your customers. 

3) Growing too fast

If your business is growing too fast, you might end up not being able to meet customer expectations and thereby damage your relationship with them. Stick to slow, steady growth.

Conclusion

Cash flow management not only decides if your company will have a future but also if it could survive any present crisis. This is the end of the cash flow story and if you get it right, it would definitely be a happy ending and if not, it would be a hard-earned lesson.

Know more about cash flow management at UpScale.

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The ultimate guide to cash flow management

If you ever wondered about why many small businesses fail to grow then cash flow management is what you might be looking for. Before we dive deep into the intricacies of the subject, let’s have a look at if history has a lesson or two for us in its books.   

Did you know ‘Kushim’ is the earliest recorded name of a person in human history? In fact, the name appears in 18 separate clay tablets used to record transactions of barley. But are you wondering who Kushim was and why was he so important that his name was engraved on those clay tablets? 

Interestingly, Kushim was an accountant in Sumer which is one of the earliest known civilizations in the historical region of southern Mesopotamia, modern-day southern Iraq. The next big question is why it had to be the name of an accountant when there were other much more renowned people and professions?

The answer to this is very simple: in order to maintain and successfully run a larger kingdom, someone was needed to keep a record of all financial transactions taking place and such was the importance of an accountant.

Similarly, to run, maintain, and grow a successful business, we need to maintain a proper flow of cash coming in and going out, so that the business does not fail due to the lack of cash on hand. 

Think of cash flow like the blood flowing through your veins, if that flow is interrupted, the heart stops functioning and everything else along with it - so understanding and maintaining cash flow is an integral part of any business.

What is cash flow? 

Cash flow is the net of the cash that comes in and goes out of a company during a specific time period. What it means is, if the money that is coming in is more than what’s going out, then it’s a positive cash flow, which is good for your business. 

If the money that is coming in is less than the money that is going out, then that’s a negative cash flow and not at all good for your business if it continues for a longer period of time.   

Remember that cash flow management is different from profit & loss, and balance sheets but is an important aspect in determining the company’s financial health.

Why does calculating a company’s cash flow management matter? 

Positive cash flow is when the money that comes in is more than the money that goes out of the company. Negative cash flow is when the money that comes in is less than the money that goes out of the company. It’s a break-even point when the money that goes in and comes out of the company is the same for a specific period of time. 

However, to run a thriving business and avoid being on the verge of survival, a company needs to keep its cash flow positive. 

Probable consequences of break-even point cash flow or negative cash flow over time are:

-Lenders or investors could conclude that your business does not provide enough income to support

the business, thus, isn’t thriving.

-It could cause dealing with a crisis like missing or delayed payroll, rent, loans, and taxes.

-It could affect your business due to missed supplier payments. 

-It could jeopardize your situation while trying to buy inventory, capital assets and equipment, advertise, and expand your operations to grow your business and instead be forced to sell them to increase liquidity. 

Upsides of keeping a positive cash flow:

-It puts your business on a growth trajectory and gives you the leverage to think strategically, take calculated risks, and plan ahead. 

-It helps you attract investment and retain talent. 

-It allows you to address problems and inevitable situations, quickly and with ready, available capital.

What causes companies to fall into the loop of negative cash flow? 

They say, prevention is better than cure, and we couldn’t agree more in this situation - so, if you get to understand cash flow then you can avoid getting into a situation where your company is trapped into a negative cash flow. Here are the pitfalls to look out for:

a) Negative cash flow due to late payments

When the amount of money that goes out is not the same as that comes in, it creates a cash gap. While you wait on your invoice payments you don’t have cash available to fund business activities. Late payments are one of the biggest reasons why small businesses operate with a negative cash flow most of the time. To prevent this, you could choose to go with business credit bureaus that are collecting information on companies all over the world and could warn you in real-time.

b) Negative cash flow due to payment terms

Payment terms define your customers how long they have to pay your invoice. “Due On Receipt,”  or an extended period of credit to your clients with Net 30, 60, or  90 days or even longer are some of the common payment terms in function. 

Think of it like, you prepared and delivered goods to a company that’s your client but the payment terms you have with that company define and allow it to pay for the goods within 30, 60, or 90 days after the delivery has been done by your side. 

In this case, you would have paid for the production and delivery of the goods from your pocket and will still be waiting for the payment from the client for the next few months. 

During this period you will not have the free cash flow to smoothly run your business activities unless you solve that negative cash flow issue.

c) Negative cash flow due to lack of cash flow forecasting

If your company fails to conduct regular cash flow analysis and cash flow forecasting, it is very likely to fall into a negative cash flow trap. Learning about them can help you navigate through this journey better: 

Cash flow analysis

Cash flow analysis can be done by analyzing the cash flow statement which can be prepared in MS Excel or through cash flow management software. Although, the former is a manual process hence more prone to error. 

In cash flow analysis, the net income for a certain duration of the past is distributed across three categories: cash provided by operating activities, cash provided by investing activities, and cash provided by financing activities.  

Cash flow forecasting or cash flow budgeting

Cash flow forecasting helps a company estimate their cash receipts and expenditures for a specific period of time in the near future. It can warn you of any case of a negative cash flow situation in the near future so you can proactively respond with a cash flow solution to prevent it.

How to manage cash flow better? 

-Conduct regular cash flow analysis 

-Prepare monthly or even weekly cash flow forecasts.

-During times of negative cash flow crisis, look for an immediate injection of cash through the means of invoice funding, invoice factoring, or sales invoice discounting.

-Opt for microfinance such as Buy Now Pay Later that offers flexibility in terms of the payment schedule and a lack of formal credit.

-Apply for Working Capital Term Loans to fulfil short-term operational needs. 

-Require clients to make partial payment in advance for larger orders

-Negotiate with vendors and suppliers to grant 30-day terms or even 60 or 90 days.

-Avoid delay in payment by reducing billing errors and confusing invoices.

-Create a credit policy that clearly defines your billing terms, interest charges, acceptable payment forms, and credit check process.

-Avoid paying fines or accruing high interest on business credit card balances by paying it on time every month.

-Consider generating cash by selling assets by carefully measuring the impact of the move on the business growth. 

-Maintain a good relationship with your bank and only use overdrafts for short-term cash requirements. 

-Employ cash flow forecasting software that uses data from the accounting platform and helps reduce the manual work of inputting data.

How is cash flow different from profit?

A negative cash flow does not imply the company is in loss, what it implies is that the amount of money coming into the company is less than the amount of money going out for a specific period of time. 

For example, suppose your company has INR 3,00,000 in outstanding invoices due for payment on the 18th of the month, but you need to pay your suppliers INR 1,50,000 by the 8th of the month. 

Now even after having more money in receivables than in payables, you simply won’t have the cash to pay your supplier on time. Here the company isn’t at loss financially, as the net payment leads to profit eventually but it still suffers from the negative cash flow. 

How is a cash flow statement different from budgeting and balance sheets?

A budget states the amount of money you can spend over a period of time, given your assets and liabilities, and revenue. Your company’s balance sheet is a statement of your liabilities, assets, and capitals at a specific point in time.

Is cash flow management any different for a large corporation and a small business? 

A large corporation can withstand longer periods of negative cash flow from operations due to the availability of greater liquidity and reserves. A small business often relies on free cash flow across investments, operations, and financing and thus can not survive on a negative cash flow for a long period of time.

Understanding the fundamentals of how cash flow management works and getting actionable in practice can save a company from reaching a situation of “do or die,” after all, nearly 27% of startups fail at the hands of a poorly managed cash crisis.

What can small businesses do to manage cash flow management in a better way?

To solve the cash flow management issue for small businesses, it is really important to understand the nitty-gritty of businesses dealing at such a scale, their limitations, liquidity, and expertise available to them. 

To make it less cumbersome for small businesses, a unified cash flow and credit management system by UpScale is one such promising solution. It has been designed by a team of people who understand the real pain points of a small business owner and what sacrifices and costs it takes to build a business from the ground up.    

We at UpScalebelieve that for a business to thrive, credit & cash flow challenges need to be solved simultaneously. With UpScale, businesses can now generate real-time business insights and get instant and collateral-free business loans.

This makes it the only platform a business needs to get better & complete visibility of their finances, have better control of their operations, and access to instant business credit to achieve better growth.

Sign up and explore how UpScale can take away all your headaches related to cash flow management and help you focus on your business growth.

Conclusion

It has been studied that the number one reason small businesses fail is due to poor cash flow management skills or poor understanding of cash flow management. In fact, 82% of small businesses face cash flow management problems. If done correctly, a business just doesn’t learn how to manage a crisis but also thrive.