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The COVID-19 pandemic is one of the most significant and impactful events of our lifetimes. It had a multi-sector impact on businesses and an even adverse impact on the lives and mindset of people. Not only did it impact the supply of various goods, but it also heavily impacted the demand in the market, and hence the investment sentiment. In survey in June 2020 by the All-India Manufacturers Organization, it was indicated that about one-third of SME enterprises felt their businesses were beyond saving. The industry group said that such a “mass destruction of business” was unprecedented. As mentioned by Nikhil Das, a silk scarf manufacturer based out of Delhi “the money supply chain has been broken” although Government has committed $50 billion, for the average Indian worker and entrepreneur it hasn’t been enough.
The pandemic impacted 19 sectors with Rs 15.5 lakh crores of debt which were not under stress before Covid-19 outbreak. Because of COVID-19 and related confusion around moratoriums traditional lenders became even more restrictive and there was a long halt in the disbursements of fresh loans in the SME sector. Lenders were cautious in disbursing loans and even cancelling previously sanctioned, or pre-approved, loans for customers who became economically stressed after the COVID-19 crisis.
A lot of measures by government such as GST and demonetisation which brought have taken MSMEs under the digital umbrella and reduced the sole reliance on private finance options to seek credit. However due to lack of clear policies at financial institutions on lending to distressed sectors made it difficult for the money to percolate downstream. In case you were an SME in a Covid-19 affected sector it was difficult to even raise secured forms of business loans. This resulted in significant liquidity consolidating with lenders who were keen on lending more to ‘safe businesses’ who were already flush with liquidity.
Now that we are accustomed to the new normal and the world seems to be getting back to the pre-covid times in terms of business, the rise in the digitation during covid is facilitating MSME’s to get financial assistance due to innovative fintech solutions from NBFCs and banks. There’s an evident difference fintech companies are bringing in for SMEs and MSMEs to assist them to rebuild the national economic engine by aiding ample collaborations, resource-sharing, and technological optimization to rejuvenate the ailing small business ecosystem. The biggest role played by FinTechs have been about providing visibility and comfort on transaction integrity – this has helped banks get comfort on cash flow and relax certain norms that they would otherwise have not been possible. Fintechs are acting as aggregators and are enabling a diverse range of financing solutions along with the traditional lenders, they bring in the innovation and flexibility required in the current scenario to bounce back these SMEs to a profitable and sustainable growth path.
Bill discounting has emerged to be one such financial service promoted by FinTechs which have proved to be a game changer in the lending spectrum. Traditional methods of lending are very restrictive and come with a lot of pre requisites that acted as hurdles for SMEs to get access to the required credit for growth. The lock in period for the traditional lending loans is too long which also results in incurring unnecessary fees along with the fact that these durations were resulting in cash flow blockage on monthly basis as businesses were focused on paying their debts rather than focusing on growing their portfolio.
Bill discounting services are very helpful for SMEs to resolve cash flow problems by freeing up funds tied up in unpaid invoices of strong counter-parties/buyers. Bill discounting has allowed Indian small business owners to raise cash quickly by collateralizing these invoices. SMEs that have discounting facilities have more liquid cash in hand for boosting sales & achieving growth targets. Inventory shortages are usually caused in businesses that have cash flow problems and aren’t able to pay up suppliers on time. Since this provides an instant injection of cash, the SMEs are able to pay suppliers and replenish their depleted inventory.
Businesses are also left with more time to focus on priority tasks related to operations rather than spending time on chasing payments, collateralising their precious security or taking on promoter liability. It is does not change the operating model or process leaving the SMEs fully in control of their business. Along with reducing late payments, businesses further save by taking advantage of early-payment discounts. In short, bill discounting is effective because it is a financial tool that helps businesses get paid faster for work, they have already delivered.
Lenders are also more comfortable with bill discounting due to better assurance of repayment and shorter repayment cycle due to the ’rub-on’ effect of payer’s credibility. It offers more returns for the lenders compared to business cash advance or overdraft. Banks facing fiscal stress due to dropping revenues find Invoice Financing ideal to diversify their lending portfolios and boost bottom lines in the short term. FinTechs are helping lenders for Invoice Discounting by building predictive models, co-lending and facilitating such transactions by managing the loan book on their platforms.
At Finovate Capital, we have 20+ active associated financiers lending through us, many of them even use our LOS and LMS to manage the loan end-to-end. Given our expertise in structuring deals, we are able to tailor deals to align with their internal risk appetite. The collaborative and synergistic relationship between Fintechs and Lenders is making sure that SMEs are getting their much needed working Capital in the ‘New Normal’.
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