Today, businesses have access to loans based on purchases, sales invoices, tangible assets like Property, Plant, and Equipment (PP&E), and intangible assets like licenses, trademarks, patents, and copyrights to meet working capital requirements.
Banks’ adoption of digital lending in collaboration with FinTechs has transformed the lending market by digitizing inter-entity communication. Technology is improving the efficiency, flexibility, and transparency of the entire loan process through analytics and the provision of app-based financing agreements.
MSMEs represent over 40% of India’s total exports, 6.11% of the manufacturing sector’s GDP, and 24.63% of the services sector’s GDP. In the upcoming years, the Government of India targets MSMEs to contribute more than 50% of India’s GDP and 75% of its exports.
However, a significant portion of MSMEs’ growth is impeded by their exclusion from conventional lending environments. Only 10% of India’s MSMEs (6–10 million) have access to official funding sources, accounting for 40–50% of the total amount of credit given to the industry. Hence, MSMEs leverage Supply Chain Financing (SCF) to empower themselves and bridge the gap through innovative products and technological advancements.
How Does SCF contribute to the adequate working capital for MSMEs?
Businesses can now instantly access cash held in outstanding invoices and monetize their sales receivables through Receivables Financing of their outstanding invoice, i.e., Factoring of Invoices. Typically, this form of Post-Shipment-Post-Acceptance (PSPA) financing mitigates the performance risk(s) on MSMEs, enabling Factoring NBFCs & Banks to step in and provide one-tap credit via phy-digital platforms commonly used.
The seller makes the financing requests, post obtaining an acceptance on the invoice from the buyer, deeming the same to be “good for payment.” Thanks to technology & most large corporations having vendor portals, such events can be tracked and managed digitally without impacting the normal business process between the seller & buyer.
There are various tools for Factoring NBFC and Banks to efficiently undertake the sales ledger & credit assessment process seamlessly, thanks to access to GST Network (GSTN) to analyze the MSMEs’ cash flows better & other forms of public credit data sets available today.
With the advent of these tools, a few Factoring NBFCs, and Banks today attempt to achieve an end-to-end digital journey for receivables financing. These financing solutions do go on to provide for the MSMEs instant liquidity at competitive interest rates. More importantly, Receivables Financing can be structured to not impact the borrowings on the books of the MSMEs under the aegis of factoring guidelines.
Growth in transaction volumes in Trade Receivables Discounting System (TReDS) platforms provides receivable financing, further emphasizing the increased adoption of financing. It can leapfrog where financing is embedded into the business process & business cycles through Digital tools.
Changes witnessed by MSMEs after obtaining finances via lenders through SCF
Since the epidemic, SCF has surpassed conventional trade financing. With the help of a sizable loan pool, fintech facilitates the convergence of buyer and supplier solutions as trade becomes increasingly digital. SCF has been practiced in India for many years, but digitization has dramatically expanded its outreach.
Working capital loans are provided through recent offerings using cash flow and transaction data that offer several advantages:
- Thanks to advances in technology and analytics, determining a credit score based on transaction data is quicker and more real-time.
- There is no need for time-consuming documentation.
These loans also enable more companies to be covered by Receivable Financing options, such as not having a big balance sheet but having quality Receivables Financing through the adoption of digital tools.
It is encouraging to learn that most business owners are optimistic about business recovery after the economic downturn caused by the pandemic, with sales in the MSME reaching 88% of pre-pandemic levels and capacity utilization in many industries close to 70%.
Government initiatives to facilitate SCF
Supply Chain Financing (SCF) has gained tremendous traction and is widely accepted internationally and in India. According to industry sources, India’s addressable SCF market is worth roughly Rs 60,000 crore, while the whole market is worth about Rs 18 lakh crore.
Amid a liquidity squeeze after the Reserve Bank of India’s (RBI) decision to increase interest rates, Receivables Financing is becoming a growing industry for Factoring NBFCs, banking companies, and venture debt (early-stage financing) companies. Moreover, the revisions in Factoring Act, combined with Trade Credit Insurance, have become more beneficial to MSMEs. They are shielded against the risk of non-payment for goods and services. Trade credit insurance protects sellers and financiers against buyers’ delays, defaults, and insolvencies.
The key takeaways
With programs like the Digital Lending framework, Priority Sector Lending (PSL), and Receivables Financing for MSMEs across banks, NBFCs, and FinTechs, the government is taking several steps to reduce the credit gap for MSMEs operating in the informal and unorganized sector.
Receivables Financing assists MSMEs in this new digital environment by lowering their financing costs and increasing business efficiency. These solutions democratize access to finance, entail financial sturdiness amongst MSMEs, and aid the smooth functioning of their operating cycles.