Empowering small businesses by transforming receivables into immediate capital
By securitising its receivables through a financial firm, the manufacturer can receive cash quickly, which can be reinvested in purchasing raw materials or expanding production capacity. This swift access to funds enables businesses to maintain smooth operations without interruptions.
the CEO of Veefin Capital, a Veefin Group Company.Over 40% of India’s export business is driven by MSMEs, which employ over 11 crore people and contribute 28% to the GDP. Despite such a significant contribution, these core sectors struggle to be part of the mainstream economy and financial ecosystem, facing a major funding crisis that holds back innovation and growth. In today’s fast-moving business outlook, cash flow management is critical to a firm’s success, and innovative financing structures are imperative given that traditional sources of capital are scarce for the MSMEs.
One option can be the securitisation of receivables, wherein MSMEs can unlock immediate liquidity and propel their growth, leveraging cutting-edge solutions with the backing of NBFCs.
How securitisation transforms cash flow
At its core, securitisation of receivables involves converting a company’s outstanding invoices into marketable securities. Essentially, businesses pool their accounts receivable—payments expected from customers—and sell them to investors, often facilitated by NBFCs. This process allows firms to receive upfront cash, transforming extended payments into immediate capital that can be used to fuel operations, investment, and growth. For instance, consider a small textile manufacturer that typically offers 30- to 60-day payment terms to retailers. By securitising its receivables through a financial firm, the manufacturer can receive cash quickly, which can be reinvested in purchasing raw materials or expanding production capacity. This swift access to funds enables businesses to maintain smooth operations without interruptions.
Driving securitisation forward with NBFCs
Financial firms play a fundamental role in the securitisation process for small and medium firms, offering the expertise and infrastructure needed to consolidate receivables and issue securities. Many businesses find it challenging to navigate the complexities of securitisation, but these institutions provide valuable guidance on structuring deals and ensuring legal compliance. They also connect smaller enterprises with a wider range of funding sources through established networks with institutional investors.
For instance, a financial firm may help a logistics provider combine its receivables, granting access to diverse investment opportunities. Additionally, securitising receivables allows businesses to share/transfer the risk, enabling them to maintain better financial health and secure funding even when customers exhibit varied payment behaviours, thereby strengthening the overall financial ecosystem.
How financial fitness can help entrepreneurs achieve long-term success
Real-world impacts of securitisation
Large corporates can also play a pivotal role in providing working capital for their MSME buyers or dealers through this method.
For instance, an FMCG company operating through thousands of dealers/distributors network can provide working capital assistance by securitisation of its receivables in one go. This process is highly scalable given financing is not done on an individual dealer’s credit profile but on the credit profile of the entire pool. Somewhat how the microfinance industry works. This space is fast evolving in our country, though securitisation of home/auto loans is fairly common.
However, while the benefits are substantial, businesses must also be aware of potential challenges. The process can involve upfront legal and administrative costs, and not all receivables may be suitable for securitisation. Additionally, companies need to maintain a robust collection process to ensure that receivables are collected efficiently. These factors can influence the overall success of securitisation efforts and should be carefully considered by businesses looking to leverage this financial tool.
Final thoughts
Securitisation of receivables (read trade assets) is fairly nascent in India. Various factors need to come together before it can become a significant part of the overall securitisation market (which is around Rs 2 trillion). Apart from the complexity of the product, there are a few other factors which are baulking its scalability. Most of the banks are reluctant to participate as they don’t have product approval for trade securitisation. Plus, regulation and taxation rules are not the most favourable as compared to other debt capital instruments, to name a few.
Despite the above challenges, the evolution of this mode of financing can be a big game changer for the perpetually capital-starved MSME sector. It provides an opportunity for MSMEs to avail financing without going through a lengthy credit appraisal process or need to provide collateral. Securitisation can open up avenues for the participation of investors like mutual funds, AIF and pension funds, apart from traditional lenders i.e. banks and NBFCs. A concerted effort needs to be made by the various stakeholders for it to propagate and make a significant impact on our economy.
(Shantanu Bairagi is the CEO of Veefin Capital, a Veefin Group company.)
Edited by Kanishk Singh
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)