MSMEs (micro, small, and medium-sized businesses) are responsible for over 30% of India’s GDP and employ around 111 million people. The backbone of the Indian economy is said to be these businesses. The Udyam Registration site had 5,767,734 MSMEs registered as of November 26, 2021. Small firms made up the majority of registered businesses at 293,555, followed by microenterprises at 5,441,220 (94.34%). (5.09 per cent). There were 32,959 mid-sized firms (0.57 percent ).
MSMEs are a key driver of growth and innovation for India’s economy. The capacity of MSMEs to secure sufficient funding is a prerequisite for their survival and growth. However, financial institutions limit their exposure to MSMEs due to the high cost of services and the danger of lending without enough collateral.
Given the significance of MSMEs for economic growth, it is essential to help them by removing the barriers relating to working capital that impede their development. Supply chain financing (SCF) is essential for accelerating MSME growth. Filling in financial shortages and offering crucial liquidity, it helps them.
Let’s first define SCF so that we may better grasp how it supports MSME growth before we go any further. SCF stands for a group of technologically based solutions intended to reduce financing costs and boost operational effectiveness for both buyers and sellers taking part in a sales transaction. A buyer can provide a vendor or seller with a 100% advance against an invoice.
A tech-based SCF solution provider who assists with early payments to vendors can make this happen.
Working capital for MSMEs
For an MSME to close the gap between suppliers and manufacturers, working capital is crucial. Over 70% of the money that small businesses require comes in the form of working capital, according to research. Here, MSME businesses may benefit greatly from supply chain finance options.
Technology-enabled SCF providers make it easier to automate transactions and manage payments and invoices. It gives both parties a short term loan that maximises operating capital and delivers liquidity. While providers would get their money more quickly, buyers would have more time to pay their bills. Both parties to the equation may use the cash on hand for upcoming endeavours in order to maintain the viability of their businesses.
Why should you choose supply chain finance?
Supply chain finance is preferable to conventional business financing in several respects. Here are a few advantages that MSMEs may take advantage of that other funding solutions do not.
- Quick access to operating money is provided
MSMEs gain from supply chain finance since it enables them to make early payments and takes care of their immediate working capital needs. Once the SCF line is formed, the money demand may be satisfied in a matter of hours thanks to the development of technology and ERP connections. For MSMEs, the money can be used to expand operations, replenish stockpiles, or purchase new raw materials.
- Helps boost liquidity
A number of MSME loan programmes have been established by the Indian government, however, they only offer one-time and non-recurring financing. MSMEs, on the other hand, need a steady stream of operating capital to meet their daily needs. Supply chain financing is focused on monthly invoicing and helps MSMEs keep enough cash on hand to continuously satisfy their working capital needs.
- Provides cost-effective solution
A supply chain loan is preferable to an MSB loan. SCF is a desirable option for MSME suppliers as it may be eligible for low-cost financing. Depending on the buyer’s creditworthiness, the supply chain connection, and the buyer-seller vintage association, lending institutions may give cash.
It is a more affordable source of cash than more conventional forms of finance, which promotes improved cooperation between the customer and the provider. Good credit score buyers can be able to negotiate better terms with the seller. MSMEs’ cash flows are expedited as a result, and suppliers are better positioned to aid in the expansion of the buyer’s firm.
Why is supply chain financing considered an easy way of financing?
Supply chain finance functions best when the buyer has a better credit rating than the seller since the buyer can get money from a bank or other financial institution for less money. In comparison to starting company loans, this benefit enables buyers to haggle with sellers for better terms, such as extended payment terms.
In the meantime, the seller might unload their items more quickly in order to get paid right away by the intermediary financial company.
With supply chain finance, sometimes referred to as “supplier finance” or “reverse factoring,” buyers and sellers are less likely to compete with one another. After all, under ordinary circumstances, buyers want to defer payment while sellers aim to receive money as soon as possible.
Supply chain financing and B2B
MSMEs are quickly converting to SCF solutions in the textile sector. About 4.5 million people are employed in the textile business in India, including 35.22 lakh handloom workers, and it is projected to be valued at more than US$ 209 billion by 2029. As previously said, SCF offers small or medium-sized firms that are struggling to expand due to blocked funding the crucial liquidity. The KG Denim instance stands out among many companies in the textile sector. The firm increased its monthly sales statistics by a staggering 1566 per cent in only seven months thanks to timely access to vendor credit.
Another field where MSME owners have grown their businesses in the market for adhesive tapes by maximising their working capital with SCF solutions. Between 2021 and 2026, the sector is expected to increase at a CAGR of 5.8 per cent, from USD 63.1 billion to USD 83.8 billion. Demand for adhesive tape is being driven by the expanding usage of sticky tapes in several sectors, as well as by increased urbanisation and improved healthcare systems.
Through supply chain financing, MSMEs may obtain cash more easily and affordably, decreasing their reliance on unofficial financial sources. Following the passage of the MSME Act, several initiatives have been launched to improve the working environment for MSME proprietors.
Borrowers may acquire loans from reputable financial organisations at better rates thanks to this straightforward procedure, which needs minimum documentation. A cost-effective method for MSMEs to satisfy their working capital needs is supply chain finance. It promotes MSMEs’ expansion and development by making financing accessible.