The term ‘cash flow’ refers to the movement of money in and out of businesses. All the enterprises rely heavily on borrowed money from other commodities to actively function daily. Businesses derive the amount from their revenues as well as take it as loan from banks or other acquisitions.
While applying for loans, the enterprises need to show their assets and display the cash-flow statement as well. Cash-flow based money lending allows the companies to borrow money based on the forecasted cash flow of the money, even if they do not have any assets to show.
Cash-flow lending (CFL) works the best for businesses that cannot show hard assets as collateral, such as SMEs (small and medium-sized enterprises). SMEs usually keep their revenue and assets below a certain threshold, so cash-flow lending acts as a boon for such firms.
The Changing Facet of CFL and SMEs
The year 2020 marked a huge shift in economies around the world as well as in India. 63 million SMEs were active in India in the previous year, as per a report by Statista Research Department. However, the financial turmoil that followed made sustenance difficult for many of these SMEs.
SMEs are a vital part of the economy and play a critical role in maintaining the employment rate. As per the Entrepreneur, SMEs with bigger growth opportunities tend to adjust quickly to their cash holding to preserve financial flexibility and predict profitable adjustments in the future.
The more the economic topsy turvy, the more possibilities for SMEs to face monetary inconsistencies in these short periods. Very likely they will seek interim loans to make up for this. That’s when cash-flow lending finds its uses.
Cash-flow lending for SMEs in India is not a new concept but is a less explored one, and now is the right time for SMEs to consider cash-flow lending as an opportunity as it is based on the forecasted income of the business. Even businesses with a history of steady cash-flow or the ones who’ve managed to keep it relatively steady in these tough times can secure such loan. In 2020, SMEs requested the RBI governor to allow banks to lend on a cash-flow basis and asked it to be considered by the Central bank.
SME Chamber of India Founder and President Chandrakant Salunkhe also expressed that “There should be cash flow basis lending for the MSME sector. It is currently on an asset basis, including stock, debtors, property, etc. Big enterprises get a loan on a cash basis” to the forum.
How CFL is Important for SMEs
CFL is the need of the hour for many SMEs across India to increase their flow of credit and unlock the impeded economy. Cash flow lending can thus bring a plethora of opportunities for SMEs, some of which are as follows.
1. Sustaining the Business
SMEs often deal with the uncertainty of demand and purchase raw material accordingly to store it. Large storage often gets in suspicion, and to deal with the stress of unsold goods, vendors opt for cash-flow lending as the best potential option.
2. Seasonal Business
Like most SMEs, owners of seasonal businesses face a massive fluctuation of business at different times of the year. But if done with diligence, CFL can also help a seasonal business owner get a loan without compromising their assets.
How CFL can connect SMEs to the lending ecosystem
From the lender’s perspective, any company’s or an SME’s accurate financial statements can show the cash flow, on which the lending decision will be based. Cash flow based lending is very different from the asset based lending of money. The cash flow in CFL of money is projected through project report and here, the lenders analyse the risk according to the future projections and they charge interest accordingly.
The fishermen community is one of the major borrowers of cash flow based money lending. They shut their business down for most of the past year, and as soon as monsoon arrives they pick up the boats, do business and repay the banks. These banks usually follow a parameter where they charge EMI for twelve months, but with CFL, banks may consider a customised loan for such businessmen to boost their turnover and morale. But looking at the current situation, this will take at least one to two years for the lenders to implement it.
As per a report by the Economic Times, AI, algorithms, and prediction analysis is the future of lending norms for lenders and banks. This will help the banks to reduce the turnaround time (TAT) for granting the loans as well. Due to cash-flow lending, the banks will be able to prioritise their fund management as they will have to shift their focus to cash inflows and outflows along with assets management.
The new norms of the world beyond COVID will also make an impact on CFL by practising highly accurate and transparent data, procured by the banks in order to correctly determine SMEs’ future revenue forecasts.
Conclusion
For cash-flow based loans, the loan amount is based on the revenue of SMEs and their capacity to pay back. CFL is the most suited format for SMEs because there is no credit rating or collateral required for the SMEs to show at the time of loan request. With the help of reliable financial statements, advanced AI and fintech tools, SMEs can opt for cash-flow lending and fulfil their immediate need without displaying their assets. CFL will offer new and cutting edge financial aid access to more creditworthy entrepreneurs while making data-driven decisions.
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