How invoice-based financing by fintechs is filling the working capital gap among MSMEs
Locked working capital is a longstanding problem among Indian MSMEs. Invoice-based financing might be the solution to unlock huge opportunities for the sector.
What bothered MSMEs the most in the last 12 months amidst the COVID-19 stress? The delay in clearance of working capital that they expected to rotate.
As per an EY report, a couple of years ago, over Rs 1.8 trillion were trapped in Indian balance sheets in the cash-to-cash (C2C) conversion cycle - stuck with debtors and in inventory. Indian MSMEs have always been managing these large working capital cycles and business exigencies/seasonality accentuates this problem quite often.
Large firms have been able to address this working capital issue with efficient working capital facilities from banks and better credit terms from their suppliers, but smaller MSMEs don’t get that. As a result, the C2C cycle of small businesses is 30-50 days more than their larger peers in the same industry. Some industries like pharma, electrical components, and logistics have much longer credit cycles.
India’s invoice financing business, itself worth a massive Rs 8 lakh crore, has been served by large financial institutions/banks catering primarily to the premium segment of top-tier anchors and their top-tier vendors and suppliers. MSMEs, however, had very limited access to this premium facility over the years.
Enter invoice-based financing
Invoice-based financing facilities can be the ideal solution to solve working capital woes. They are typically priced at rates lower than term loans by banks/factoring companies and fintechs. The borrowing limits are also more dynamic and aligned to existing interest rate cycles and seasonal requirements.
Here, financing limits for MSMEs are not decided only on the basis of asset-worthiness or financials. The lead indicators are transaction data, and so MSMEs can take large projects with working capital requirements without additional capital infusion or asset hypothecation.
Globally too, organisations like SAP have acquired multiple supply chain fintech firms and integrated them into the financing ecosystems of the corporate clients. Progressive corporations have also shown willingness to partner with fintechs that offer hassle-free integrations with their accounting systems, transparency of invoice flows, and financing to their vendor and supplier base, which in turn results in better sales and margins.
Fintech to the fore
The Reserve Bank of India in 2017 instituted an online bill-discounting platform, the Trade Receivable Discounting System (TReDS), that gave power to MSMEs to raise funds by selling trade receivables from corporates. These platforms, along with fintechs, have funded over Rs 20,000 crore in the last financial year. And, they seem to have barely scratched the surface.
The time is right for these firms, which are now targeting this very large segment and the missing middle/bottom layer of the ecosystem that can benefit with the new-age technology stack and GSTN integrations, and efficiently unlock the working capital.
Fintech firms enable low-cost integration between accounting systems of all entities that give real time visibility of transactions that can be discounted, at source. They also provide smooth MSME on-boarding within a few days, accurate real-time verification of invoices and self- serve dashboards, link repayments to digital liens on cash inflows, and make it very easy for customers to unlock high working capital. Many of these firms have even been using machine learning and blockchain technology to solve the problem of unique invoice identification and multi- stakeholder involvement.
MSMEs the ultimate beneficiary
As many as 47 percent of Indian MSMEs now use digital tools for business processes, sales, and payments.
Invoice financing facilities offered by fintechs, with wide access due to their technological interfaces and corporate partnerships, will be a boon for the MSME sector as it gears in contributing to the growth of the economy. These MSME firms can, in turn, negotiate healthy cash discounts from their suppliers and move into the virtuous efficient capital management cycle.
Invoice verification timelines are reduced to real-time basis versus long process of manual approvals and validation resulting in significant savings. MSMEs don’t have to worry about accounting, reconciliation, and visibility of invoices, which is provided at various levels at the tip of their digital interfaces.
Lastly, digital processes enables MSMEs to finance various stages of the cash conversion cycle ( pre or post-shipment financing), unlocking significant growth opportunities.
The ease of doing business and scaling with fintech firms covering the immediate short-term working capital needs, in close liaison with suppliers and vendors, will be a game-changer in the times to come
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of .)
Edited by Teja Lele