MSME guide to invoice financing: The MSME sector has emerged as a vibrant and dynamic market over the past five decades. It is the backbone of the country’s socio-economic development, contributing 30% to India’s GDP. The sector has shielded the country from several global economic shocks and adversities. Today, we have ~633.9 lakh MSMEs, 324.9 lakh businesses in rural areas and 309 lakh businesses in urban areas. What’s astonishing is that despite their crucial role in the country’s growth and nationwide presence, they have to face several finance-related challenges which hinder their growth.
Small businesses face challenges in their growth path In India, the trade finance gap is high. This phenomenon usually impacts small businesses as they have limited access to financial assistance. Unfortunately, only 14-16% of MSMEs have access to credit. Traditional financing options like bank loans often require substantial collateral and have stringent credit requirements, making it difficult for MSMEs to have the necessary funds in place. Moreover, the application and approval process for securing loans is often time-consuming.
This leads to delays that can impact the businesses that are in dire need of capital. Hence, they tend to suffer due to a lack of sufficient credit and liquidity which eventually affects their day-to-day operations and vision for long-term growth. If there is a delay in customer payments, then also small businesses deal with capital issues, further making it challenging for MSMEs to cover daily operational costs and explore new business opportunities. Roshan Shah, Co-Founder and CEO at VoloFin says that the non-payment of invoices can severely impact their financial stability and overall performance and profitability, eventually making them vulnerable to the risk of bad debt.
He discusses how fintech solutions can change the business scenario for the small businesses in India.
Fintech platforms: A one-stop solution for small businesses
Financial crunch is a consistent issue for small businesses, and fintech platforms strive to provide a feasible solution for this by offering several innovative solutions from invoice financing and integrated credit insurance to collateral-free financing, full tech stack support, and more.
“They leverage technology to simplify the application process, making it easier for MSMEs to access financing. Leveraging advanced algorithms and data analytics, fintech platforms are advantageous for small businesses as they offer competitive rates and flexible terms compared to traditional lenders,” he said.
Unlike traditional avenues, fintech companies often do not demand extensive collateral. They also do not have stringent credit requirements, making it easier for small businesses to access finance. Fintech platforms streamline the entire financing process for MSMEs, whether it is application, fund disbursement or any other task, significantly reducing the timeframe for businesses to access capital.
Fintech solutions when integrated with robust risk assessment tools help minimise the risk of bad debt. These tools then help in analysing a wide range of data points to evaluate the creditworthiness of the businesses which makes capital access convenient and easy.
Invoice financing: An innovative solution for small businesses’ credit-related woes
Fintech companies are revolutionising the invoice financing landscape by introducing innovative solutions that address the challenges faced by MSMEs. Invoice financing allows businesses to utilise their outstanding invoices for access to immediate capital. Instead of the endless wait for customers to pay invoices, businesses can sell them to a third-party financier (usually known as a factor) at a discounted price. This enables them to have immediate cash flow, with which they can manage their operational expenses and even invest in long-term growth vision.
We have two types of solutions under invoice financing: invoice factoring and invoice discounting. In the case of invoice factoring, the business sells its invoices to the financier, who then takes over the responsibility of collecting customer payments. Invoice discounting revolves around the business borrowing finances against its invoices. However, in this process, it retains control over the collection process.
Digital invoice financing involves a series of steps that make the process quick and efficient:
Businesses to share a formal application with the fintech companies
The first step is for the business to share a formal application with a fintech platform, providing necessary details about the outstanding invoices and the customers involved.
Verification of invoices and assessment of businesses’ creditworthiness
The fintech platform then verifies the invoices and assesses the creditworthiness of the customers using advanced data analytics and risk assessment tools.
Approval of capital
Once verified, the fintech platform approves the financing and offers terms to the business.
Disbursement of funds
After mutual agreement on the terms and conditions of the association, the fintech platform disburses the funds to the business. This usually takes 24 to 48 hours.
Invoice Collection
Depending on the type of invoice financing (factoring or discounting), either the fintech platform takes over the responsibility of collecting payments from the customers or the business continues to manage the collection process.
Repayment
The final step is repayment. The business repays the financier once the customers pay their invoices, or the fintech platform directly collects the payment from the customers.
To conclude
Small businesses have a significant role to play in our country’s economic growth story. Despite their importance, they face hurdles such as limited access to credit, high interest rates, slow loan processes, etc. Fintech platforms address the issues of MSMEs with their innovative solutions. They offer more accessible, competitive, and efficient financing solutions, empowering MSMEs to manage their daily operational expenses with better access to cash flow and focus on their growth. Invoice financing, in particular, is a vital tool, providing access to capital and streamlining the cash flow roadblocks. By understanding the steps involved in digital invoice financing, businesses can leverage this tool to maintain financial stability and drive success in a highly dynamic, competitive market.
