Supply Chain Financing: An End To Working Capital Woes

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#Features, $2.5 trillion by 2025 , Supply Chain , CredAvenue's , vendor finance , CredAvenue

For anyone running a business, working capital woes are nothing new. Clients (even large, multinational ones) expect payment terms of 30, 45 or even 180 days, while vendors often have to be paid on delivery or shortly thereafter. For small businesses, this is particularly tough, as it usually means foregoing business opportunities that require larger buffers than what the business is used to. Growth boils down to what one’s cash flow allows. 

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This is particularly tragic, because technically the business has already earned the money, even if it hasn’t hit the bank accounts. Of course, the Covid pandemic has made matters much, much worse. For many small businesses, it rang the death knell as bigger companies deferred vendor payments. 

Don’t Supply Chain Financing Solutions Exist? 

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Financing solutions to this problem do exist, but none of them are particularly attractive to MSMEs. Loans from banks (if one even qualifies) are slow, require unending paperwork, and offer inflexible terms. Loans from smaller lenders are extremely expensive. Other options like Purchase Order financing (raising money from lenders based on a PO) and Invoice Discounting (short term loans against assured invoices) traditionally only work when the MSME’s client is a reputable corporation and when the MSME has the paperwork demanded by lenders. Also, if invoices and POs are too small, or if the business hasn’t been around long enough, these options don’t work. 

The World Economic Forum has warned that the global trade finance gap could reach $2.5 trillion by 2025 as large numbers of funding applications continue to be rejected due to a lack of collateral or information from the requesting entities. Recognising this, the Govt amended the Factoring Act in 2020 to allow NBFCs to offer factoring services to MSMEs. 

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Factoring is a great way to unlock capital stuck in unpaid invoices. This is how it works: Say MSME A fulfils an order and raises an invoice for ₹100,000 payable in 3 months to Client B. Factoring allows MSME A to sell this invoice to a third party (an NBFC or a bank) at a discount (₹95,000 for example). MSME A solves their cash flow problem, and the buyer makes a profit (of ₹5,000 in 3 months!). Two conditions need to be met for this to happen: Client B must agree to factoring and approve the invoice, and they must be a large corporate entity. 

So, Why Don’t MSMEs Use Supply Chain Financing? 

It’s a great system, but there is an inherent problem. While the Govt plans to mandate companies with over ₹250-crore annual turnover to register on the TReDS (Trade Receivables Discounting System) platform, so far, only 1% of large corporations have agreed to do factoring. The demand from the MSME sector exists, but the large corporate entities they serve aren’t excited to participate. 

However, it doesn’t need to be this complicated. Even when large corporations choose not to participate, factoring can be a frictionless process. Fintech firms today have access to much more data than ever before and are able to do the necessary checks without additional paperwork. 

  • Is the invoice raised to a large entity?
  • Does this supplier have an ongoing relationship with this entity and has been paid in the past?
  • Can GST analysis show the volume and frequency of invoices and payments?
  • Is this invoice in line with previous invoices?
    Provided these questions are answered satisfactorily, there’s no reason to deny factoring services to small firms.

The Need Of The Hour: A Supply Chain Financing Platform and Maketplace 

Fortunately, this is what CredAvenue’s Supply Chain Platform does. CredAvenue’s marketplace model has aggregated the largest network of lenders covering the requirements of corporates of all sizes and across sectors and the rating spectrum. The mountain has come to Mohammed! 
Additionally, the marketplace offers both vendor finance and dealer finance (tier 1 and tier 2) solutions to large anchor corporates and also invoice discounting solutions to MSMEs, thereby freeing up idle capital for reinvestment. According to Surajit Das, Chief Business Officer, Supply Chain Finance, CredAvenue, “Supply chain finance is the first credit solution that MSMEs should get. It unlocks idle capital and accelerates economic growth.”

By using proprietary risk scoring and matching algorithms, CredAvenue helps match supply chain finance solutions offered by lenders to the businesses’ specific needs, which means that businesses spend less time searching for solutions that are right for them. 

Conclusion 

This will be the third budget into the Covid pandemic, and the Govt is expected to come up with measures that set up the economy for growth. India has the second-largest number of SMEs globally, contributing to 29 percent of Gross Domestic Product (GDP) and 49 percent of exports while employing over 110 million people. The government of India plans to put SMEs on the global map, and the upcoming budget is expected to bring changes that provide impetus to those plans. 

MSMEs with a strong business proposition would do well to set themselves up for success with the right Supply Chain Financing solutions now before the opportunity comes knocking. 

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