When Prime Minister Modi gave a 40-minute speech on November 9, 2016, announcing the demonetization of Rs. 500 and Rs. 1000 banknotes, the 1.3 billion people of India were taken totally unawares!
There was panic and chaos among the people, since almost 80 percent of the monetary base was wiped out in one fell swoop. What could once guarantee the most upscale clothes and lavish meals, was merely a useless piece of paper now.
While the positive effects can take time to materialize, in the short term, most people are having to bear the brunt of this drastic move. This is especially true for small and medium sized businesses that function largely on liquid cash.
If your business is also suffering due to a liquidity crunch, it is time to consider solutions like bill discounting. Here is what you should know about this solution.
Why is Liquidity So Important?
Now let's talk about the importance of liquidity. Businesses thrive on capital. Without adequate financial support, they are unable to meet their everyday requirements for smooth functioning and revenue generation.
For instance, in order to ensure uninterrupted business functions, business owners need to pay their employees salaries on time, electricity and telephone bills need to be paid, loans need to be cleared, raw materials need to be procured, office stationery needs to be replenished, and so on. While bills and salaries can be transferred directly from the bank, paying vendors and suppliers might be an issue at the present moment.
So, what is the Solution?
Imagine this scenario – you have rendered services to one of your clients and received bills of exchange worth Rs.50, 00,000. But the payment is pending for nearly 3 months, and you require funds right now for your day to day business requirements. You know that it is useless chasing a client for bill payment at a time when they too are facing the same liquidity crunch as you. So what will be your immediate step to tackle this issue be?
One option is to apply for a loan. However, this means that you not only have to fulfill all the eligibility criteria, you also have to find a way to repay the loan amount along with the interest rate. Why burden your business with more liabilities? It is time to reduce liabilities with options like bill discounting.
This facility enables you to trade your receivable in exchange for cash. Also known as invoice discounting, the financial institution takes over your pending invoices, pays you what is due minus the fee, and thereafter the headache of getting money out of the client lies with the NBFC or bank.
The same holds true if you need to pay pending bills. In this case, you could apply for trade finance and tackle your liquidity crunch with ease.