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My experience in my own venture and working for few successful and some not so successful ventures has taught me a thing or two about managing Cash Flow (Start-Ups discard heavily funded VC firms here as they have a different model altogether). Business requires fund for 3 activities primarily viz. Setting Up Business, Managing the Monthly Operations Cost and Working Capital (For eg. to buy Raw Material etc). In my humble opinion expansion and growth fund has to be generated by business and supported by debt route.
Most of the entrepreneurs set the business from their own savings (It included things like Register New Company, Website, Business Registration/Tax Registration etc.),
Monthly Operations would include things like Office Rental, Basic Team, Internet, Promoters Expense etc. Ideally speaking business should have cash for atleast 1 year when it starts and at any point of time, it should have cash for atleast 6-8 months of operations. You can read our blog for more information (http://ca4you.in/blog/2016/04/19/factors-to-keep-in-mind-before-register-new-business-7-point-cheat-sheet/)
The biggest challenge comes when a start-up needs some urgent working capital (to purchase raw material to process a new order, or pay advance to some vendor for a confirm order etc. etc.). This is where a lot of start-ups faces the real heat and have to actually shut shop. In India we do not have any avenue wherein startups/SMEs etc can raise working capital and these ventures gets in clutches of loan shark.
There is (some) good news for such ventures and there are certain avenues now which could come for their rescue. We would enumerate a few of them in this blog here:
1- NBFCs: India has thousands of NBFCs who work dedicatedly towards providing working capital loans to startups without any collateral. The monthly interest rates they charge are in range of 2% p.m. and the paper work is minimal. Most of the NBFC either look for atleast 1 year of business record (like Balance Sheet, Tax Returns etc.) or ask for some collateral. Typical loan size depends on your Annual Turnover (25-30%) or size of the contract.
2- FinTech: Fin-tech is the new kid on block who are raising funds left right and center. Most of these Fin Tech works as an aggregator model and have hosts of HNIs (High Networth Individuals), NBFCs etc. on their platform which allows start-ups to have more options and even NBFCs to choose projects from host of projects. The rate of interest is again in range of 2% p.m. and the requirement is also less stringent as loans are given to companies who are 4-6 months old. Typical loan size depends on your Annual Turnover (25-30%) or size of the contract.
3- PSUs: PSUs have long being trying to systemize loans for SMEs and start-ups and various schemes are launched by banks. The issues are not so friendly approach of the bank staff, paper work, lack of clarity etc. But if you have a good contact in banks, it would make sense to try to this option as interest rates are generally low (1.25% p.m.) and Loan size is also typically high. This is different from overdrat policy which is commonly used by bigger companies.
4- Mudra Loan and Government Schemes: Government is currently giving a lot of emphasis on creating a start-up ecosystem and funding features high up on the agenda. Through Mudra Loans and various other schemes, government is trying to provide micro loans to fund small ventures. Of course paper work would be cumbersome and loan amount would be small but any money is helpful for a start-up
5- Factor Invoicing: A fairly successful and prevalent option in West, India is warming up to this sector. The modus operandi of factor invoicing works like, If you have a pending payment of 1 Lac from a firm (you have rendered the service and raised the invoice) and there is delay in payment or the payment is supposed to be remitted after 30 days and you need payment urgently, then you can go to such Factor Invoicing companies who will pay you 95k immediately (for eg.) and then would receive the payment of 1 Lac from company direct. The industry is in nascent stage, documentations are lengthy but still is worth to explore.
Hope this blog was informative for you. Get further updates on not only Accounting/Book-Keeping/Government Compliances but also about all new rules and regulations/opportunities for funds which will be your industry specific
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