There are different segments that contribute to India’s economic development. Similarly, micro, small, and medium enterprises (MSME) contribute 30% of the country’s GDP through national and international trade. The meteoric rise of MSMEs in the country is a positive sign for future growth as the number of small and intermediate enterprises increased at a CAGR of 18.5% from 2019 to 2020. The loans disbursed to the MSMEs have been a staggering Rs. 9.45 trillion in the current fiscal year, showing a massive surge from last year by 40%. The heavy credit provided to this sector indicates the importance attached to it for the government
Small and medium enterprises are truly the backbone of the economy. Hence, they need to be taken care of and protected from the roadblocks that hinder their proper functioning. One of the biggest problems they face is a lack of adequate credit availability. As many as 27-29 million MSMEs have no access to formal credit facilities. Credit is the lifeline for businesses to prosper and operate efficiently; therefore, the issue of lack of credit needs to be addressed.
Invoice funding to the rescue
Invoice funding is an instrument of finance used to meet the immediate working capital needs of a business owner. When owners want to maintain sufficient cash flow while expanding their business and buying new stocks, they can use get their invoices financed by a bank, NBFC or new age fintech companies. The new age lenders have been able to innovate new programs till the last mile supply chain system with the help of the manufacturers. It is creating a win-win situation for all stake holders. The manufacturer can dispose of more stocks, Distributors and Retailers are able to buy more stock with the Invoice funding support. Few manufactures and Distributors are also willing to offer cash discounts to those who plan to avail this offer and return the money to lender within free credit period. Smart borrowers are able to pay zero interest in spite of using the invoice funding facility.
Here’s why it can be a tool that can be a stepping stone to success for a small business:
Improved cash flow: Having unpaid invoices was never a feature of a flourishing business. But times have changed now. Invoices can be cashed without disrupting the flow of money in small companies. Invoice financing provides flexibility to avail credit facility without any hassles. Most of the new age lender also extend this facility as an unsecured facility on the comfort of the suppliers. The funds put them in a superior position to control expenses, cash inflow, and help them capitalize on opportunities that come along. This facility becomes super useful for them during peak season time.
A constant companion and customization as per your needs: With invoice funding, companies can choose the cash they require. They can have complete control and only access the amount of funds they require, whether a part of the invoice or full cash from the invoice. Not only this, but they can also decide the specific time they want the invoice to be financed. Since these funds are short-term loans, they are usually paid back within a month. The borrower has also choice to churn the credit limit multiple time during the tenor of the facility. Most of the lenders create a credit line of min 12-18 months as a revolving line of credit.
A transparent process and simplified repayment options: New age Invoice funding lenders follow a flexible eligibility criteria for their clients. A fool-proof supply chain financing system is structured to provide up to 90% of the value of the bills. A pliable repayment plan, which can vary from 15 days to 6 months, is attributable to the size of the business and the cycles of repayment, making it a very handy instrument for many companies. There is also an option to repay the lender in a lump sum to avoid additional interest charges.
Mitigating the risk of bad debts: Bad debts can be a serious crippler for a business. The outstanding dues worth Rs. 15 trillion reflect the daunting ground reality for MSMEs in this country. Invoice discounting can help in mitigating such bad debts with their credit checks on the debtors. They have professionals dealing with such defaulters and if the program is made in consultation with the manufacturer, the chances of delinquency becomes almost negligible.
Money in the bank in a jiffy: Invoice financing can be swift. It does not require extensive paperwork to acquire the loan. Once a connection has been established with an invoice fund provider, the credit line can be created with min documentation and paper work. The manufacturer/Distributors gets the money within 24 hours post loan document completion. The digital revolution is further expected to reduce this timeline in coming days.
No need for any collateral: The bills presented to the lender for funding are the only assets that is normally used as a collateral in the case of invoice financing. Companies that are neophytes or have a small turnover with fewer assets can take advantage of this benefit. The unsecured nature of credit facility makes the process faster and smooth.
As small businesses are the lifeline of our economy, they have been handled very assiduously by the government through funding and promotion. The issues they face are evident too. Not being eligible for formal credit is one of them. Financial tools like invoice funding can help MSMEs punch above their weight in the industry and focus on their goals. Short-term liquidity and shrinking the working capital cycle can be a blessing for businesses, and such instruments help do the same. The product is getting popular every day and lenders are willing to explore this untapped space for next level of credit growth.
Views expressed above are the author’s own.