The MSME sector has constantly been generating some serious outputs
in the recent few years. It is of paramount importance for the current
entrepreneurs who are currently operating in the country within this
sector. Supply chain finance can definitely accelerate MSME financing
in India. The current approaches to obtain financing for the MSME
business loans are relatively limited. The Ministry of MSME has come
up with multiple schemes and provisions for the welfare of the
businesses that are functioning within the MSME sector.
It is also a well known fact that many businesses that are within the
boundaries of the MSME sector are slowly beginning to realize the
various financing options that they currently have to run their businesses.
Micro, Small and Medium Enterprises (MSMEs) contribute nearly 30%
to India’s Gross Domestic Product and generate employment for
approximately 100 million people in India. MSMEs lay a solid
foundation for India’s economic development and are a significant
source of innovation and progress. Access to adequate finance is critical
for the survival and growth of MSMEs. However, financial institutions
restrict their exposure to MSMEs because of the high cost of servicing
and the risk of lending without sufficient collateral.
Supply chain financing (SCF) plays a crucial role in bridging the financial
gap to revitalize MSMEs and provide much-needed liquidity. Through
SCF, financiers provide payment solutions to MSME sellers by
discounting their invoices while enabling buyers to optimise their
working capital.
Following are some of the ways in which supply chain financing is
helping to bridge the gap for the MSMEs in India :
A. Access to capital at the right time :
Supply chain financing provides early payment solutions to MSMEs and
immediately fulfils the demand for working capital. With the onset of
technologies and ERP integration, once the SCF line is set up, the fund
requirement is fulfilled within a few hours. MSMEs can utilise this
money to maintain inventory levels, procure new raw materials, or
expand their business operations.
B. No burden of repayment :
There is a significant difference in loan payment terms under credit
guarantee schemes and supply chain financing. Under credit schemes,
the rate of interest is lower. But borrowers need to repay the amount
due within the stipulated timeframe.
For more information: https://smeventure.com/provisions-for-dealing-with-delayed-payments-to-msme-sector/
However, it is not the same under supply chain financing. MSMEs have
no repayment burden since it’s an advance against invoices due to
MSME sellers. Financiers settle the payments by collecting directly from
the buyers on the due date.
C. Periodic source of liquidity :
The Indian Government has launches multiple different MSME Credit
schemes but the majority of them is a single time non-periodic access
to liquidity. MSMEs do need a constant flow of capital in order to
maintain and manage their expenses on a daily basis. The concept of
supply chain financing is on the basis of monthly invoices and it thus
provides the MSMEs with an opportunity to have sufficient cash to
meet the continuous capital needs of the businesses periodically.
The concept of supply chain financing is based on the idea of a value
chain financing in order to avail best small business loans. SCF is an
attractive option to obtain extremely low cost financing for MSME
sellers. Majority of the lending institutions extend funds on the basis of
the buyer’s creditworthiness and the supply chain relationship that
they have maintained basically the long term relationship of the buyer
and the seller are accounted for.
It is thus a very comprehensive source of raising liquidity in contrast to
the traditional ways of applying for capital approval. Supply chain
financing promotes a much better form of collaboration between the
buyer and the seller. The majority of the MSME business buyers that
have a decent credit rating can negotiate better terms from the seller.
As a result of all this, the MSME industry as a whole is experiencing a
surplus of capital and the amount of cash flows in constantly on the rise
within the MSME businesses and it strengthens sellers to contribute
better in growing the buyer’s business.
Supply chain finance brings about financial inclusion :
SCF has existed for decades, but access to real-time data like bank
statements, GST, and e-invoices has streamlined the end-to-end
process with digital integration and technological advancements.
Digitization has improved the amount of efficiency of the entire process
and reduced the cost of supply chain finance.
With the advent of supply chain financing, MSMEs have easy access to
finance at a lower cost, reducing their dependence on informal funding
sources. It is a straightforward process with minimal documentation
and allows borrowers to get funding at better terms from formal
financial institutions.
Do watch: https://www.youtube.com/shorts/mxmhEv0xPgM
Supply chain financing is an efficient financing alternative to meet the
working capital needs of MSMEs. By offering easy access to credit, it
accelerates the growth and development of MSMEs in India.
Financial supply chain management is of paramount importance for the
welfare and further development of the industry as a whole. It is very
important for the MSME business holder to acknowledge the support
of the Ministry of the MSME and other institutions to enable such
beneficial things for the growth and increase in demand for the MSME
sector.
MSME business loans can be availed by a variety of options nowadays
due to the digitization of the whole process and various schemes
pertaining to business loans help the businesses from this sector to
access capital and thus continue growing their businesses forward.
Supported by AI, ML, blockchain, IoT and other technologies, the SCF
industry is making working capital funding processes more transparent,
efficient, responsive, and reactive. However, compared with global
trends, the SCF penetration rate is India is much slower. It is estimated
that the Indian SCF market size is approx. Rs.80,000 crore, which
represents less than 5% of the entire banking system’s outstanding
assets. This gap is expected to narrow as Indian MSMEs continue to be
pushed along by the tide of digitalization.