Empowering businesses to ensure readiness for MSME payments

The implementation of the 45-day MSME payment rule has brought about a substantial change in the landscape of supplier payments in India. MSMEs, which account for 30% of the country’s GDP, 48% of total exports, and 40% of the total workforce, are said to broadly benefit from this.

In an effort to support the financial stability of MSMEs, this new rule requires larger buyers to make payments more quickly. While the long-term benefits are great, navigating this new landscape presents both challenges and opportunities for businesses of all sizes.

Understanding the rule’s impact

Though MSMEs will benefit from this, the repayment rule poses a few challenges for corporates. The supplier credit period has drastically shrunk, putting pressure on cash flow and making it challenging to plan for future payments as well as manage day-to-day operations.

To bridge this gap, companies may increase their borrowing. In a worst-case scenario, some corporates might even shift to non-MSME suppliers to avoid the stricter terms that could hinder MSME growth. Initially, MSMEs might witness delays and even return goods due to late payments becoming temporary issues.

These short-term challenges hold the potential to foster a more efficient and financially responsible business ecosystem in the long run.

Challenges and considerations for different stakeholders

Although the new rule is beneficial for smaller businesses, these measures introduce new problems into the environment.

Large companies seem trapped in a situation where shorter payment cycles for MSMEs need to be catered to, and, at the same time, their own accounts receivable, which may not be very long, should be taken into consideration. Meanwhile, MSMEs selling to large enterprises might face downward pressure on prices due to the shorter payment window.

These early roadblocks necessitate adaptation, but they will ultimately contribute to a more robust business ecosystem. The essential point to moving the uncertainty to the next level is to accept change.

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What lies ahead: Decoding the 45-day MSME payment rule

Here are some strategies businesses can adopt:

Open communication and collaboration

Creating transparency in communication and implementing the strategy for relationship management between the MSME partners can be a matter of great importance for success. This process can do the job of regulating clear terms of payment and eliminating possible problems that might arise.

Financial planning and cash flow management

Implementing robust financial planning and cash flow management practices can help businesses anticipate and address working capital constraints. Exploring supply chain financing options can prove to be a prominent solution—with ‘purchase invoice discounting’ and ‘sales invoice discounting’—which is beneficial to both MSMEs as well as corporates.

For corporates, this financing option serves as a great solution where banks, NBFCs and digital fintech platforms discount the purchase invoices and pay the MSMEs within the stipulated timeline, while still enjoying a longer payment cycle like earlier. It also helps them secure a reliable supply chain by ensuring on-time deliveries from financially healthy suppliers.

MSMEs gain access to faster payments and improved working capital, allowing them to invest in growth. This capital can be utilised by them to repay their outstanding invoices for their raw material purchases. By bridging the gap between the short payment cycles for MSMEs and the long-term payments for enterprises, it is a win-win solution for both the players.

Leveraging technology

Digital payment platforms and supply chain financing tools streamline payments, improve overall process efficiency, and reduce mounting costs.

Empowering collaboration for sustainable growth

The MSME payment rule aims for not only individual company preparedness but also fosters a collaborative business environment. Establishing clear payment terms within written agreements can provide certainty and mitigate potential conflicts. Dedicating some resources to platforms that finance the suppliers can be advantageous to all the stakeholders as it ensures a timely payment procedure.

By proactively adapting to the new regulations, businesses can not only ensure compliance but also unlock the immense potential of this transformative change. This collaborative approach, with a focus on transparency and financial empowerment for MSMEs, will pave the way for long-term growth for all participants in the Indian business ecosystem.

The author is CEO and Co-founder, Bizongo, an AI-powered vendor digitisation platform.