Freecharge’s Merchant Cash Advance aims to build trust in the MSME lending space

The Micro, Small, and Medium Enterprises (MSME) sector in India has had a rough couple of years. Rising inflation, spike in raw material costs, restricted access to formal banking capital, finance and credit, as well as the pandemic has left the sector reeling. According to government data, 5,079 businesses have shut down in the financial years of 2020-21 and 2021-22.

Developments like these are disheartening when one considers the positive impact that MSMEs have on driving employment and bringing industrialisation to the rural and underdeveloped areas of the country. It is estimated that the Indian MSME sector is expected to contribute around 50 percent to the country’s GDP by 2025. It is also the second largest employment generator in India, as of FY22, with over 111 million people employed.

Siddharth Mehta, CEO, Freecharge, sat down with Priya Sheth, Senior Anchor, YourStory Media to discuss MSMEs, loan eligibility for these businesses, and a new lending product called Merchant Cash Advance.

Alleviating the merchant’s financial burdens

Most MSME transactions rely on cash (given the low scale of operation, working style and limited financial management). Due to restricted access to financial support through traditional mediums, small businesses often struggle to cover employee salaries, bills, taxes and their loan EMIs in a timely manner. Furthermore, as Siddharth pointed out, business owners don't have the time to go to a bank or fill out paperwork, because they’re stretched for time managing a business. Similarly, the problem with banks was that they were unable to reach out to this segment and understand how to underwrite these customers due to lack of enough information in place.

Keeping this in mind, Freecharge launched a new product - Merchant Cash Advance (MCA) in association with Axis Bank. MCA comes with a free Axis Bank current account where the merchant or customer can reach out to the branch for any assistance or query regarding the loan.

This product aims to widen the scope of loan eligibility for Micro, Small, and Medium (MSME) size merchants and reduce the burden of heavy monthly repayments. MCA is designed to provide these merchants with needed working capital along with easy repayment options. Businesses can apply digitally for loans ranging from Rs 5,000 to Rs 5 lakh based on their transaction history on Freecharge platform, and their CIBIL score.

MCA also offers MSME business owners a feature known as Easy Daily Instalment (EDI) under which the instalments gets deducted in small amounts from their daily QR settlements, eliminating the burden of paying a heavy instalment at the end of the month. This digital product requires no documentation, apart from Aadhaar and PAN details, and allows businesses to choose their loan tenure.

“The idea is that you use this loan to evolve your business capabilities, expand the inventory into your shops, and grow your business,” said Siddharth.

Targeting the micro to small businesses

According to Siddharth, a large amount of MSME lending is directed towards medium to larger enterprises. This leaves the micro and small businesses in the lurch. The MCA product aims to smoothen the way for smaller businesses through instant, digital loans. Small businesses can apply with very little paperwork and the loan is disbursed in 10 minutes. Additionally, Freecharge has worked on pricing the loans right, offering some of the lowest interest rates in the segment. Finally, merchants can use the free bank account for all their business purposes, apart from the loan. The EDI feature will also serve microentrepreneurs well, allowing them to pay their loans bit by bit without disrupting their working capital or their cash flows.

Building trust in the lending space

The road to recovery will be paved by digitisation of financial products and services. Already, these products are facilitating remote transaction management, seamless delivery of products, and easier access to services. It will also help in creating better customer experiences and a smoother customer journey. MCA offers clean processes, on-time disbursements of loans, and daily collection of loan amounts. All of which will go a long way in building trust with MSME merchants. Furthermore, with Axis Bank, merchants also have a wide network of bank branches where he or she can go to clear doubts.

In the last five years, Freecharge has worked on building their financial capabilities and services, such as BNPL (Buy Now Pay Later) lending for their customers, or an express FD on the Freecharge platform. Currently, the company has mapped out plans to add more product variants to the MCA and refine the user experience based on the traction it sees in future.

You can watch the entire interview,