Micro, Small, and Medium Enterprises (MSMEs) account for about 30% of India's GDP and employ approximately 111 million people. These enterprises are referred to as the backbone of the Indian economy.
As of November 26, 2021, the Udyam Registration portal had registered 5,767,734 MSMEs. The number of registered micro-enterprises was 5,441,220 (94.34 percent), followed by small businesses at 293,555 (5.09 percent). The mid-sized businesses stood at 32,959. (0.57 percent ).
MSMEs are a vital source of innovation and growth for India's economic development. MSMEs' ability to survive and flourish depends on their ability to obtain enough financing. However, because of the high cost of service and the risk of lending without sufficient collateral, banking institutions limit their exposure to MSMEs.
According to a report published on Economic Times, just 10% (6 - 10 million) of India's MSMEs have access to institutional financial sources. This, despite MSMEs accounting for 45 percent of manufacturing production, more than 40 percent of exports, and contributing to India’s GDP by 28 percent.
Given the importance of MSMEs to economic growth, it is critical to assist them by eliminating the working capital-related hurdles that slow their growth. SCF (supply chain finance) plays a pivotal role in fast-tracking MSME growth. It assists them by bridging financial gaps and providing the much-needed liquidity.
Before we deep-dive into understanding the role of SCF in fueling MSME growth, let us understand what SCF really means. SCF refers to a set of technology-based solutions that aim to lower financing costs and increase business efficiency for buyers and sellers involved in a sales transaction. A buyer can help his sellers or vendors with 100% advance against the invoice. This is possible with a tech-based SCF solution provider who helps with early payments to vendors.
Let us decode why SCF is crucial for MSMEs.
Working capital is very important for an MSME to bridge the gap between suppliers and manufacturers. According to a report, over 70% of the funds needed by small businesses is in the form of working capital. Here is where supply chain financing solutions come in as a boon to MSME owners.
Technology-enabled SCF providers help automate transactions and make tracking payments and invoices a seamless experience.
It provides a short-term loan that optimises working capital and offers liquidity to both parties. Buyers will have more time to pay their invoices, while suppliers would have quicker access to the funds they are owed. The cash on hand may be used for future endeavours on both sides of the equation in order to keep their respective enterprises afloat.
In many ways, SCF is more advantageous than traditional business loans. Here are some benefits that MSMEs can avail of, which other financing options lack.
Supply chain finance benefits MSMEs by allowing them to make early payments and meeting their urgent working capital needs. With the advancement of technology and ERP connection, once the SCF line is established, the money demand might be met in a matter of hours. The cash can be used to replace stocks, buy new raw materials, or expand operations for MSMEs.
The Indian government has set up a variety of MSME credit programmes, however they only provide one-time and non-recurring funds. MSMEs, on the other hand, require a consistent flow of operational cash to satisfy their day-to-day requirements. Supply chain finance is based on monthly invoicing and assists MSMEs in maintaining sufficient cash on hand to meet their working capital requirements on a continuous basis.
Supply chain financing is better than msme loan. Because it may get low-cost financing, SCF is an appealing choice for MSME vendors. Lending institutions offer cash depending on the buyer's creditworthiness, supply chain relationship, and buyer-seller vintage association.
When compared to traditional types of financing, it is a cost-effective source of capital that encourages better collaboration between the buyer and the supplier. Buyers with a good credit score may be able to get better terms from the seller. As a result, MSMEs' cash flows are accelerated, and sellers are better positioned to contribute to the buyer's business growth.
When the buyer has a stronger credit rating than the seller, supply chain finance works best because the buyer can obtain cash from a bank or other financial provider at a lower cost. This advantage allows buyers to bargain with sellers for better conditions, such as longer payment terms, and is a better option as compared to startup business loans. Meanwhile, the seller can unload its goods more swiftly in order to earn prompt money from the intermediate finance organisation.
Supply chain finance, often known as "supplier finance" or "reverse factoring," counteracts the usual competitive dynamic between buyers and sellers. After all, in typical situations, purchasers try to postpone payment while sellers want to get paid as quickly as feasible.
MSMEs in the textile industry are fast switching to SCF solutions.
The textile industry in India employs about 4.5 million people, including 35.22 lakh handloom workers, and is expected to be worth more than US$ 209 billion by 2029.
As explained above, SCF provides the all-important liquidity to small or medium businesses struggling to grow owing to a blocked capital.
Among several businesses in the textile industry, the case of KG Denim is noteworthy. With on-time access to vendor finance, the company grew its monthly sales figures by a massive 1566% in just seven months.
The adhesive tapes market is another industry where MSME owners have achieved business growth by optimizing its working capital through SCF solutions. The industry is predicted to grow at a 5.8 percent CAGR between 2021 and 2026, from USD 63.1 billion to USD 83.8 billion. The growing use of adhesive tapes in a variety of industries, as well as greater urbanisation and enhanced healthcare systems, are driving adhesive tape demand.
Tapes Mart, a water-based adhesive BOPP tapes manufacturer, was facing a shortage of working capital. They were searching for a platform that could offer them instant relief from the pains of a stagnated cash flow. They opted for a tech-enabled supply chain finance solution and resolved its issue of inadequate funds by 90-95%. This, in turn, brought massive progress in their business, with sales numbers increasing by 10x in less than 12 months.
Corporates and OEMs have recognised that their future is based on a variety of factors. They must assist SMEs by providing multi-tier SCF programmes that may be handled in-house or by a third party. A successful SCF programme will assist in mitigating the risk of unpredictability in cash flows.
Most of the MSMEs obtain loans at usurious interest rates from informal sources of funding. Formalisation would be critical, and the appropriate mix of incentives and assistance might lead to more MSMEs becoming eligible for formal financing.
SCF is a solution that would give MSMEs many benefits. It is critical to educate MSMEs and their anchors about such choices for streamlining cash flows.
MSMEs have easier access to capital at a cheaper cost through supply chain financing, reducing their reliance on informal funding sources. After the incorporation of the msmed act, various solutions have started acting on enhancing the working experience for MSME owners.
It's a simple process that requires little documentation and allows borrowers to obtain loans from professional financial institutions at higher rates. Supply chain financing is a cost-effective way for MSMEs to meet their working capital needs. It stimulates the growth and development of MSMEs by providing easy access to finance. If you are looking to support your MSME business through supply chain financing - Bizongo is all you need.