Experts discuss how Supply Chain Financing can optimize MSMEs’ working capital during holidays

By Puja Sharma

In preparation for festive season, MSMEs serving in Auto, Electronics, Fashion wear and related sectors have larger orders to fulfill and thereby their requirement of working capital has gone up multifold in this festive season. Supply chain finance provides quick cash flow support to MSMEs at affordable interest rates allowing them to take advantage of this consumer demand.

“We have witnessed a surge of more than 60% in invoices financed during the period August to Oct 2023 versus April to July 2023. The MSMEs from West and North India have gained the largest share of this financing. The unique part of this proposition is that MSMEs don’t have to deal with any specific bank. They have to onboard themselves on M1xchange and entire facilitation has been enabled on the platform.” said Sundeep Mohindru, Promoter & Director, M1xchange.

The cost of financing ranges between 7% pa to 11% pa by the banks and between 10% pa to 13% pa by the NBFCs, depending on the risk profile of MSME customers. This cost of financing is very competitive and enhances the growth of MSMEs.

The customers of these MSMEs i.e., large corporates have found this digital way of financing MSME invoices exceptionally smooth as process of onboarding such MSMEs is flat 15 minutes and process from invoicing to payment completes within 24hours of approval of invoice. This facility has strengthened their Supply chain and inturn enabled growth of their business.” Mohindru further added.

Collaboration between Fintech companies, banks, and corporates is driving innovation in embedded financing and expanding access to finance for MSMEs. Supply chain financing and embedded finance together empower MSMEs, driving economic growth and a brighter future for small businesses in India.

Raja Debnath, Managing Director, Veefin Solutions noted, “As consumer spending surges during the festive seasons, MSMEs need higher working capital to cater to this demand. Banks and NBFCs are witnessing a significant rise in loan requests from MSMEs, with a 35% increase (over the preceding months) in limit utilizations on our supply chain finance platform.”

“This festive season is both essential and challenging for India’s small businesses,” said Aniket Deb, Co-founder & COO, Bizongo, as on one hand it presents them with significant revenue-generating opportunities but on the other, these cash-crunched businesses are faced with formidable challenges, particularly in managing working capital and inventory to meet the exorbitant demand.”

This is when digitization of supply chain processes and embedded financing comes into the picture. Using an embedded ecosystem of financial institutions on a platform, MSMEs can get access to multiple lenders who can make scalable lending decisions based on authenticated transaction data, streamline their payments, eliminate human errors by digitizing tedious manual paperwork as well as increase efficiency and productivity within their operations all contributing to faster and efficient processes.

Deb noted, a solution like this could help these vendors grow their businesses eliminating financing bottlenecks, especially when demand is high during the festive season. This also makes small businesses less reliant on traditional lending channels, giving them more financial freedom and independence. Furthermore, to be prepared for the festive season, vendors can optimise their supply chains and improve raw material procurement by using the actionable insights and predictive intelligence that vendor digitization platforms offer before the festive season starts.”

“As MSMEs in India gear up to meet the festive demand and seize the opportunity to increase their sales & revenue, they often experience financial barriers due to lack of access to formal credit channels. The lack of comprehensive & reliable data from authentic sources poses a major challenge for financial institutions while providing them credit.” Prashant Muddu, MD & CEO, Jocata.

To address these challenges, Jocata developed SME DNA, a proprietary AI/ML-based risk and business intelligence score that provides a deep understanding of an MSME performance across business cycles thereby highlighting any potential risk associated with the business. Our data science team analysed customer consented data provided by the MSMEs to the lender to develop the score, empowering credit underwriters with more transparent & actionable insights and reducing the total Time-to-Credit (disbursal) for the borrowers from 2-5 days to less than 6 hours.

SME DNA’s AI/ML powered scoring model assesses the entity for its growth consistency, segment stability, checks the health of and (over)dependence on the MSMEs’ buyers and suppliers, among other risk factors thus bringing more MSMEs into the formal credit fold. Additionally, it helps MSMEs access timely credit, build credit history, and avail loans on more favourable terms thus strengthening the credit ecosystem for them and driving India’s growth ambitions.”