Is cash flow-based lending outdoing asset-based lending?

Over the years, businesses have witnessed a dramatic shift in the way they operate and fund working capital needs. They have a plethora of options to fund their operations, making loan processes complex and time-consuming. 

Borrowing from commercial banks and NBFCs, or considering asset-based loans require credit assessments and a strong balance sheet. The process usually takes months to complete as lending institutions assess the liquidation value of assets, account receivables, collateral, and other determining factors. 

Contrary to conventional lending, new-age fintech platforms are intertwining data and technology to provide financial access to enterprises with improved turnaround times and simpler documentation. 

These solutions evaluate a business’s cash flows in the underwriting of the loan terms—a boon for Micro, Small, and Medium Enterprises (MSMEs) with limited funding options, as most do not meet the asset-backed lending criteria.

According to a BlinC report, formal lending institutions, including banks and NBFCs, cater to less than 15% of the MSMEs sector’s credit demand, and a credit gap of Rs 25 trillion needs to be bridged by cash-flow-based lending.

How can fintech platforms help?

Technology and digital solutions have revolutionised lending practices, ensuring company-wide transparency, accountability of operations, and promoting financial inclusion. The ecosystem enables lenders to identify borrowing patterns and creditworthiness while providing seamless credit access to borrowers. 

Insights based on dynamic factors consider more practical and accessible factors over the credit scores of a business. Along with cash-flow health, fintech companies monitor alternate data points, including daily operating activities, GST data, and invoices, while considering time sensitivity and seasonality to assess the risk-bearing capacity of the business. 

Powerful backed data analytics and strengthened IT infrastructure of fintech platforms seamlessly collect and assess data and provide alternate scores enabling artificial intelligence (AI) to underwrite loans. 

The Indian digital lending market size is estimated to reach $1.3 trillion by 2030 from $270 billion in 2022, highlighting the increasing relevance of technology in the lending ecosystem. 

Digitisation of lending and borrowing processes also enables potential borrowers to complete online documentation, simplifying complex paperwork, and processes, which helps businesses improve productivity, as they can unlock cash stuck in unpaid invoices through supply chain financing.

Ensuring financial inclusion of MSMEs

The MSME sector is a crucial sector that contributes to more than 50% of India’s exports and employs over 120 million people in India. Experts predict that the MSME sector will grow by 100% by 2025. Thus, it is paramount the sector achieves financial inclusion in the country.

Fintech platforms offering cash-flow-based credit enable small businesses to access loans compared to traditional credit approaches. Timely and adequate access to capital help MSMEs bridge the gap between the inflows and outflows of finance, enabling enterprises to stay afloat and aid their expansion plans.

The digital ecosystem also facilitates unsecured funding and invoice discounting for small turnover businesses, provides accessible solutions and opportunities to scale up their operations, and supports local economies. 

Fintech platforms act as support systems for last-mile borrowers, catering to niche MSMEs that traditional lending institutions avoid due to poor track records or balance sheets. 

These platforms can solve the long withstanding economic problem by seamlessly penetrating credit into underserved markets, enabling entrepreneurs to improve and sustain their operations. 

Bottom line

Offering credit based on cash flow provides lenders with a comprehensive picture of the potential borrowers. 

Technology-enabled solutions provide a win-win situation for both lenders and borrowers, as it helps them reduce the turnaround time by digitizing and streamlining processes, pivoting factors of providing alternate credit facilities like cash flow-based lending. 

Considering the potential and untapped market, fintech platforms’ innovative solutions will play a crucial role in ensuring the nationwide financial inclusion of MSMEs.