Small businesses are the foundation of the Indian economy. The micro, small & medium enterprises (MSMEs) sector contributes to about 30 percent of India’s GDP. But despite being the largest employing faction of the country, they suffer from a lack of financial and regulatory security.
Businesses thrive when they have enough funding and a stable cash flow. MSMEs take the hit here as financial institutions are hesitant to step in because of their high service cost and payback risk. Credit risk assessment can be complex for lenders, as there is often little structured financial and historical cash flow information to work with.
For small businesses, the direct result of the credit gap is a cycle of low profitability and stunted growth, making them vulnerable to even the smallest economic changes. Sadly this is the reality for all businesses.
Considering these firms’ importance in our society, if the economy is to boom, it’s important to extend help by offering solutions to combat capital problems. Over 70 % of the funding required by MSMEs is in the form of working capital. Traditional financial institutions are fail to provide needed loan products that work for these businesses, and that’s when supply chain financing comes in.
Supply Chain Financing For Small Businesses
Supply chain financing refers to technology-based solutions that help lower financing costs and boost business efficiency for both parties involved in the sales transaction. The buyer can help sellers or vendors with 100% advance on their invoice.
When the supplier issues an invoice, the buyer confirms it and has it approved by the SCF provider. The lender makes the payment to the supplier, and when the payment is due, the buyer pays the lender. This helps stabilise the supplier’s cash flow as they get paid quickly. The buyer benefits from this arrangement as they’ve managed to extend the payment terms without harming the supplier’s cash flow.
Let’s understand how supply chain financing can be a game changer for MSMEs.
How is SCF Helping MSMEs?
Supply chain financing can help small businesses to grow and expand their venture. Your business will flourish if you go with a direct lender or work with a third-party lender. Here’s how SCF is helping businesses:
1. Smooth Supply of Goods
SCF is a flexible way to finance your business, and it can be an alternative to traditional bank loans, which may not be available or affordable for your business. It enables the smooth flow of goods between buyers and sellers by eliminating the need for intermediaries in the supply chain.
This means more goods can flow through the supply chain, resulting in lower costs for all stakeholders and better customer service for consumers.
2. Available For Early-Age Startups
Because of their credit history, supply chain funding can be a viable option for early-stage startups, as they often face difficulty in easily accessing financing from established organisations.
The wide range of benefits SCF offers to small businesses, including lower interest rates and faster loan approval times, make it the ideal financing solution for growing startups.
3. No Repayment Schedule
MSMEs benefit from supply chain finance as it allows them to pay upfront and meet their urgent working capital needs. With SCF, suppliers can receive reimbursement for bills sooner, reduce unpaid sales, and increase cash available for future investment. This form of loan does not require a repayment period.
Supply Chain Finance (SCF) offers a wide range of products such as Trade Finance, Factoring, Invoice Finance, and others. The term “supply chain” refers to the fact that SCF involves several companies in the supply chain.
4. Increased Liquidity
The Government of India has launched various credit schemes for MSMEs, but they only provide one-time and non-recurring funds. On the other hand, MSMEs need a constant flow of operating cash to meet their day-to-day needs.
Supply chain finance is based on monthly invoicing and helps MSMEs maintain enough cash to meet their working capital needs.
5. Cost-Effective Source of Capital
So many businesses are attracted to SCF as an option for funding as it can secure low-cost financing easily. Before approving that financing, lenders consider the buyer’s creditworthiness, the link length, and the supply chain’s relationship.
It is a more cost-effective source of funding than traditional forms of financing, fostering close relations between buyers and suppliers. Buyers with good credit can negotiate better terms with sellers. As a result, MSMEs’ cash flow accelerates, and sellers can better contribute to the growth of buyers’ business.
Due to significant transaction and integration costs, SCF was previously only available to large organisations. However, with technological advancement, SCF is increasingly becoming popular among MSMEs and lenders to reduce operating costs. The digitization of SCF procedures such as invoice acceptance, invoicing, and e-payments has significantly reduced SCF’s costs, making it feasible even for small transactions.
Wrapping Up
In India, only 10% of MSMEs have access to formal financing, which accounts for about 40-50% of the credit extended to the sector. The rest of the MSMEs borrow from informal financing sources at differential interest rates. The right set of incentives and support can make more MSMEs eligible for formal credit.
Supply chain financing offers many benefits to MSMEs and provides them with the resilience they need to face a new wave of economic turmoil. Educating MSMEs and their anchors about these alternatives is important to streamline cash flow. Many of these micro-businesses need to scale and become big, and the way forward is to bring supply chain financing on stage with small businesses.
Are you looking to streamline your business’s lending procedure? Finezza offers a wide variety of products such as Loan Origination Software and Loan Management Software that helps lenders smoothly run credit applications and process KYC documents quickly.
Get in touch with us today so that you can make smarter financial decisions.
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