How new approaches to finance are solving credit problems for SMEs, startups

Although India has made significant progress in advancing its financial inclusion agenda, SMEs (small and medium enterprises) are still underserved. Even though SMEs play a major role in India's economic growth and are important contributors to job creation, access to finance has been a key constraint for these small businesses.

During the second day of TechSparks 2023 in Delhi, Karun Arya, Chief Growth Officer at GetVantage; Mukesh Mohan Gupta, President of Chamber of Indian MSMEs; and Kartik Bakshi, Head of Merchant Lending at BharatPe, discussed fresh financial strategies for SMEs and startups. They also gave some tips to small businesses to access easy financing.

The new ways of financing

For a while, SMEs were heavily reliant on traditional financing methods. However, technology-driven data is transforming SME financing into a digital realm.

Highlighting the trend, Arya touched upon revenue-based financing method where capital is provided to small or growing businesses by investors in return for a fixed percentage of their gross revenue. 

“In the past, revenue-based financing resembled invoice discounting. Now, with a tech-infused approach, there's a digital-first perspective. We're not just examining traditional financial data but also leveraging alternative data sources to offer SMEs innovative, unsecured financing without collateral or personal guarantees,” Karun highlighted.

Arya also talked about crowdfunding options for SMEs. 

New approach to lending by BharatPe

Referring to the shift in SMEs' financial landscape, Bakshi emphasised the widespread adoption of UPI in his discussion and said, “Many small merchants such as kirana store owners lack access to formal credit due to various reasons. They lack credit scores, collateral, balance sheets, and financial information. This challenge led BharatPe to bring in cash-flow-based financing using UPI, addressing the needs of these business owners without traditional lending criteria.” 

This allows BharatPe to gain insights into a merchant's business volume by using their QR code, empowering the company to construct effective underwriting models.

Bakshi also discussed BharatPe's EDI model (Easy Daily Instalments), offering merchants an alternative to avoid potentially burdensome EMIs (Easy Monthly Instalments).

Challenges in the MSME ecosystem: Public sector banks

“Despite evolving times and technology, challenges persist within the MSME ecosystem. What posed a challenge two decades ago continues to be a hurdle today,” said Gupta.

Speaking about public sector banks, Gupta spoke about the problems faced by the public sector banks, and highlighted that banks are duty bound to do priority sector lending where MSE (micro and small enterprises) fall under the category. So, they are running behind bankable MSEs.

“One perception needs to change that banks don’t want to lend, and if they won’t lend the bank will shut. There are borrowers and there are funds, but the correct match is missing. MSMEs need to have a transparent balance sheet. The capacity, ability, and the intention to repay has to be shown,” Gupta added.

“MSMEs don’t have a one-size-fits-all approach,” said Bakshi, and that’s the reason these markets weren’t funded. There needs to be a cut in category with the kind of fund requirements. There are specific segmental approaches which are happening now.

There’s a big problem to solve, said Arya, adding that GetVantage did a study with RedSeer recently where they came across credit requirements for digital SMEs in India, which is about $220 billion, but only $53 billion is met. 

The panel concluded by underscoring the substantial gap and sizable opportunity in SME funding through innovative financing methods.