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Liquidity crisis for SME and how to manage it

If an SME wants a loan, then they should think of taking a term loan (any loan which is for a defined period) as OD limit keep increasing

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DQINDIA Online
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SME

With unlock 3.0, life is coming back to normal. However, if we talk about the normalcy in the business sector, there is still a long way to go. We all know that finance is the backbone of any company and the lockdown has ruptured the finance of SMEs to a large extent. Also, it is a fact that it is the most neglected domain in SME by business owners. It has been found that most of the SMEs get in the trap of increasing loans year on year and don’t look back at balancing the finance. Experts are of the opinion that if the loan amount increases every year, then the owners need to look back at the business model and understand that it is not viable for the market.

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What could be the reason?

This eventuality occurs when SMEs don't focus much on Inflow Outflow ratio. This takes place over a period of time, ultimately widening the gap, and then the situation goes out of control. It also happens because when money gets stuck in excess stock, deadstock, old debtors, and so on.

What is the solution?

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First of all, there should be no OD/CC limits. If an SME wants a loan, then they should think of taking a term loan (any loan which is for a defined period). OD limit is never for a definite period and keeps increasing year on year. In term loan, at least some principal amount is repaid every month. Also, it is very crucial to keep a minute eye on cash flow statements. At any given point of time, outflow should not be more than Inflow.

As a smart business player, one should keep a strict eye on the payment and credit period given. If there are old, stuck payments, it is suggested that the business owner should make a list of all such people, assign a finance person of the company and ask them to call on every alternate day. It is important for the leader of the company to keep an eye on every activity and be consistent in follow-ups.

Also, as and when SMEs plan to take a loan, they must make sure to review all the loans from time to time, check the current interest rate, repayment structure, and more. They should have an analytical mind, to understand whether any cheaper loan is available or not. They must also check whether small loans can be closed and the number of loans can be reduced to make the financial position of the company stronger. Once companies are clear on an existing loan, they should make sure to prepare a summary and then check what other banks are offering.

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Once the analysis is done, paying off the highest rate of interest loan should be done to help strengthen the financial position of the business and make the company in question grow at a faster rate.

To ensure a smooth process, getting a loan repayment plan will help companies understand the total amount of debts; therefore, extra income can then be used in clearing those debts. Extra money in this context refers to money made from selling off all the deadstock, recovering old payment and decluttering the stuff which hasn't been used for more than a period of 1 year. Also, money saved from banks' interest cost is called extra income and the income from extra sales or working part-time after working hours.

By Prateek Agarwal, Founder Success World

Author/Business Coach/Entrepreneur

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