India has over 42.50 million small and medium industries, comprising over 95% of the industrial units in the country. Together, they produce more than 6,000 different types of product and employ 40% of the country’s total workforce, working as the backbone of the large scale companies across India.
However, despite their substantially large numbers, they only hold an asset of approximately Rs. 14,000 Crore and account for only 16% of the total business financing availed from various financial institutions. It shows the severe lack of funding these organizations across the country faces on a regular basis.
Experts believe that a lack of adequate working capital is one of the primary limiting factors of India’s manufacturing prowess. A recent analysis of CRISIL shows that the gap in current assets and current liabilities of such companies has consistently increased since 2015. Currently, the manufacturing sector shows a 13% shortage as per surveys. The service sector, however, shows a higher 16% shortfall.
The importance of working asset
It is essential for an entrepreneur to ensure the business never runs out of working capital. It works as a crucial monetary backing that allows organizations to pay for their overhead expenses and cater to various short-term and emergency financial requirements. Assets including cash, inventory, short-term investments, and due payments are all considered as working asset of a company.
Identification of the different sources of working capital and managing those is essential to run an effective business. Organizations have to identify and sort the income sources along with financing options to maintain the assets ratio effectively.
There are several sources of capital financing that small and medium-scale enterprises can benefit from. Let’s take a look at some of them.
Sources of capital financing
- Business loans – A Business loan is probably one of the most common types of working capital financing. Several financial institutions offer this type of credits to eligible organizations. A feature-rich business loan can be utilized in various purposes, like procuring equipment, expanding operations, and increase working capital. The flexibility and large loan amount make it ideal for micro, small, or medium enterprises alike.
- Working capital loan – Working capital loans are tailor-made to mitigate only the short-term financial requirements of an organization. One can utilize the sum to overcome financial deficiency, sales fluctuation, prepare for bulk orders, increase cash flow, or even pay suppliers in advance with this advance.
- Invoice financing – Invoice financing can help companies that face severe working capital deficiency. In this scenario, lenders pay directly to the seller of goods and services instead of handing over the money to a borrower. The firm receives essential raw materials to start their manufacturing process and can pay the due amount once they start selling the finished products.
Working capital financing is one of the essential factors that every small and medium scale organization should look into. Proper working asset management can make or break a small business.
Companies should also employ sufficient resource planning with capital management to ensure they do not spend more than what is needed on possessions. Ideally, an organization should not stock raw materials or finished products for too long; it can drain finances with warehousing costs. The money should also not be utilized to purchase equipment or real estate; such investments should be made with the help of a long-term financing option.