Supply Chain Finance for MSMEs

Micro, small, and medium enterprises, commonly known as MSMEs, are the backbone of our country’s economy. The sector accounts for almost 29% of the GDP and approximately 49% of total exports. The Indian Government aims to increase MSME contribution to more than 50% and 75% of the GDP and exports, respectively.

However, the biggest constraint MSMEs face is inadequate access to the formal lending system. Most of these ventures need access to adequate credit to meet their working capital requirements.

Challenges for MSME financing

• Weak credit flow: Even after the Government developed credit and liquidity policies for MSMEs, credit flow to the segment remains weak. One of the biggest challenges is that banks and non-banking finance companies (NBFCs) are reluctant to lend, as MSMEs are perceived as high-risk borrowers.
• Collateral requirements: Most MSME businesses have low credit ratings, which makes the lenders skeptical about their repayment capabilities and levy more stringent terms and conditions. MSME loans come at higher interest rates and have cumbersome documentation, strict repayment conditions, and more collateral requirements. Since most businesses in this segment cannot meet these requirements, they opt for unsecured loans from the informal lending system.
• Lack of financial expertise: Many MSMEs are located in rural areas and most such entrepreneurs need more financial expertise to make accurate business decisions. Poor decisions may result in entrepreneurs choosing the incorrect lenders and paying higher interest rates, which may cause cash flow and working capital issues.
• Liquidity Squeeze: Most MSMEs are suppliers to larger companies and rely on them for business and work with the credit terms offered by the more prominent organizations. Any delay in releasing payments or halt in their operations may cause severe liquidity issues and impact the cash flows for the MSMEs. Therefore, they must choose quicker funding sources to run their daily operations smoothly. As a result, MSMEs cannot focus on long-term plans to expand their businesses and access to better credit can help such companies overcome their limited liquidity.

Supply Chain Finance – Panacea for MSME funding woes

In the modern world, companies, distributors, and suppliers are digitally connected and businesses are transforming their operations to adapt to the technological changes. Supply chain finance (SCF) has seen significant growth globally, with an increase of 17% CAGR.

However, in India, even with the Fintech and banking boom, MSMEs face challenges in accessing credit. Low credit scores, lack of credit history, and small ticket-size loans force MSMEs to borrow under unfavorable terms to meet their funding requirements. SCF is essential in overcoming these challenges and encouraging financial inclusion.

Benefits of SCF for MSMEs

• Access to working capital: SCF provides immediate access to MSMEs to meet their WC requirements at a competitive cost with flexible repayment terms. Technical advancement and ERP connectivity can enable the credit facility to be set up quickly. MSMEs can use the funds to purchase raw materials, expansion, or meet other business requirements.
• Cost efficiency: Compared with traditional loans, SCF provides a cost-efficient funding option while encouraging better collaboration between buyers and sellers. Buyers with a good credit score can avail of better terms from the sellers, accelerating the WC cycle for the companies and driving growth.
• Greater liquidity: Businesses require regular cash flows to ensure smooth operations. SCF relies on monthly invoicing and offers invoice discounting to ensure businesses have sufficient cash flows to meet their regular capital requirements.

MSMEs lack access to timely credit facilities and SCF provides a conducive option for their growth. SCF offers efficient and affordable access to funds and reduces reliance on alternative sources. It is a format offering regular and continued access to funds to meet the companies’ requirements, thereby encouraging better inventory turnaround, optimal use of resources, and an agile and speedy system.

FinTech, Supply Chain Finance, and FlexiPayment

Indian FinTechs use advanced technologies like Artificial Intelligence and Machine Learning for the digital delivery of various product segments. These technology companies are playing a crucial role in developing supply chain logistics, overcoming roadblocks, and reducing delays.

FlexiPayment has worked extensively to understand the different problematic areas related to the working capital requirements of MSMEs. The company has launched a cutting-edge technology platform targeted specifically for this segment. FlexiPayment is gradually building a digital ecosystem around the cost-effective delivery of Supply Chain Finance, which will make it simpler, faster, and easier for MSMEs to access finance to meet their fund requirements.