Why Supply Chain Finance will change the way SMEs get financed in 2020?
Small and Medium-sized Enterprises (SMEs) have become a high priority for governments world over as they directly impact economic development and employment. Despite its criticality, access to finance remains a key constraint affecting the sustainability and growth of small businesses.
Over the years, Supply Chain Finance (SCF) presents itself as a viable solution to this continual strife for working capital. In addition to meeting the needs and expectations of all its stakeholders -buyers, sellers, and financiers, increasing digitization augments its relevance further.
As we step into the new decade, let's take a look at the trends which can potentially revolutionize how SMEs are financed:
1. Government policies – The Indian Government has been placing enormous emphasis on the role of MSMEs in India's future and is undertaking several initiatives to make this a reality. With a mission to increase MSME contribution to GDP to 50% from the current 29%, several schemes have been rolled out, focusing on MSME ease of business and growth.
Trade Receivables Discounting System (TReDS), an initiative launched by RBI in 2014, offers a transparent platform for MSMEs to access capital by selling their trade receivables to financiers at competitive rates. The TReDS platform ensures shorter invoice-to-cash cycles and improved access to formal banking to MSMEs. With over 2000 MSMEs on-boarded to the TreDS platform and over 7000 crores of invoices financed in FY19, the initiative has already begun its journey to revolutionize working capital for MSMEs. Cashinvoice has created a single-window platform that can help companies facilitate access to financing from both TReDS and banking partners.
Another critical government initiative is e-invoicing to facilitate B2B invoice authentication electronically using the GST network. It is set to be rolled out this year and will improve account reconciliation and SCF efficiency. Information asymmetry is one of the critical challenges restricting the scalability of supply chain finance. Through e-invoicing, the chances of misinformation are reduced to nil as there is no possibility of duplication of invoices.
2. Technology - With the advent of technology, the end-to-end process of financing has evolved significantly. Technology and automation have helped in increasing speed, accuracy, and overall efficiency of conventional financial services processes, from digital onboarding to instant reconciliations and settlements. RBI's recent guideline allowing financial companies to accept video KYC is just one of many uses of technology to streamline access to capital. With Artificial Intelligence and Machine Learning technology, financial institutions today are equipped to understand their customers like never before and are in a position to engage better, and offer exceptional customer service and support. Seamless financing solutions such as those provided by Cashinvoice that provide flexibility to small businesses and their buyers to decide when to discount and at what rate to discount would not have been possible without technology.
3. Fin-tech ecosystem – In today's uncertain economic conditions, there is a rising demand for financing solutions that are dynamic and evolve with changing business landscapes. Unpredictable economic conditions impact MSMEs even more acutely as they operate on a thin financial buffer. Worldwide, there is a steady growth in a fin-tech ecosystem that is gradually fulfilling this demand. Banking on technology, these new-age companies are revolutionizing finance for small businesses with better reach and favorable financial terms. Almost all these solutions rely on the strength of the supply chain linkage of SMEs to give bankers the initial confidence before cross-selling alternative financial products.
While the fin-tech industry is relatively new to India, it has seen tremendous growth, with its market size expected to double from current $1.2 billion to $2.4 billion in 2020. Supply Chain Finance backed with technology has the innate ability to penetrate deeper, cater to the diverse needs of small businesses while leveraging the conventional supply chain linkage will transform the way SMEs are financed.
Co Founder- Cash Invoice