How dynamic discounting can be a win-win for both MSMEs and large corporates

COVID-19's effect on businesses continues to linger. While the pandemic has certainly acted as a catalyst for innovation across sectors, continuing lockdowns and restrictions are impacting businesses’ ability to stabilise, recover, and grow.

Several companies have been adversely affected when it comes to their cash flow and the ability to generate working capital. Delayed payments and a drastic drop in business have created a huge shortage of incoming cash, whereas cash burn in the form of salaries, rent, and other expenses continues unabated.

The primarily affected companies are MSMEs. In May 2020, the Government of India announced six schemes under the Rs 20 lakh crore Aatmanirbhar Bharat stimulus package.

The three main schemes were the Rs 3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) collateral-free loan scheme, the Rs 20,000 crore subordinated debt for MSMEs, and the Rs 50,000 crore equity infusion through the Funds of Funds (FoF).

However, according to a recent study by the Consortium of Indian Associations (CIA), 88 percent of 81,000 MSMEs surveyed have yet not availed these packages due to ineligibility or because they weren't able to fulfil the strict qualifying criteria.

In fact, according to another survey by LocalCircles, 59 percent of Indian startups and micro, small and medium enterprises (MSMEs) are expected to scale down, shut down or sell themselves this year due to the second wave.

The core challenge is that Indian MSMEs are being crushed under a mountain of receivables. MSMEs form the supplier backbone to all the large corporations of the country, and as manufacturing and sales get curtailed, both new purchases and existing dues are delayed or halted altogether.

Between delayed payments, an increasingly conservative lending sector, and inadequate traditional vendor financing programmes, MSMEs have few answers at the current stage.

Ensuring that liquidity through banks and NBFCs reaches the MSMEs in need has been a priority for government programmes, beneficial vendor financing programmes lie very much within the remit of buyer corporates. These programmes essentially provide early payments to vendor MSMEs on dues, reducing the paid value by a “discount”.

The buyer can make some savings on its bills. The discount is generally less than what the seller would pay in interest to get the same amount as an external loan. When it works, it is a win-win arrangement. However, manual deployment and rigid “one-size-fits-all” structures set up by buyers affect adoption by sellers.

On paper, such a programme is available for the thousands of MSMEs that make up the supply chain of a large corporate, but in reality, a fraction of sellers actually make use of such a programme.

Discount rates that don’t work, manual negotiations that leave relations soured, and lack of seasonal flexibility to opt-in or out or just some of the reasons for lack of adoption.

Modern programmes need to democratise access to working capital through modern dynamic discounting.

In the last few years, the flexibility of cloud-native applications and the ubiquity of AI and Machine Learning has brought such programmes into the 2020s. Modern “dynamic discounting” programmes address many of the challenges of scale for vendor finance programmes.

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A dynamic discounting platform allows buyers to set up granularly flexible programmes, which can be set up to meet the needs of specific sectors of their vendor base.

Vendors can access early payment when they need it, and even choose their own discount rates. Among the current crop of large corporates who form the early adoption base for such platforms, have seen rapid adoption across their supply chain, and a significant increase of supply chain resilience to prepare for the post-COVID-19 era.

MSMEs who have benefitted from these programmes have increased their turnover by as much as 25 percent during lockdowns, been able to reduce debt on the books, increase production, and operational scale due to higher availability of capital and weather the COVID-19 uncertainty with relative ease.

Being able to choose discount rates allows MSMEs to adjust to seasonal variations in demand and capital requirements.

AI-based algorithms can predict demand for early payment from MSMEs and provide rapid to instant sanction on requests, and funds being delivered in a matter of days, paperwork, and collateral-free.

The time for MSME recovery is now. Large-scale government programmes and structural reforms do help MSMEs in a significant way, but tend to take time for their impact to be felt on the ground. Digital early payment programmes can be set up in a matter of weeks, leveraging existing cash and liquidity in the system already.

Post-COVID-19, supply chain resilience and digital transformation is already high on the to-do list for a lot of companies, and programmes that also directly improve the lot of MSMEs need to be put on the top of the list.