Credit and Finance for MSMEs
India saw a whopping 63 million medium and small enterprises (MSMEs), which refers to enterprises whose capital investment cannot go above Rs 10 crore, struggle to continue operations seamlessly owing to the grave limitations the global coronavirus pandemic brought about. Harsh lockdowns led to a massive migration of labour, one of the pillars of the export cycle. And if this was not enough, freight rates have shot up by more than seven times for Singapore and five times for Hong Kong since August. They surged a staggering 282 per cent for Australia, 117 per cent for Qatar, 185 per cent for Stockholm, 181 per cent for New Zealand, and 108 per cent for New York. Another big deterrent to the survival and growth of India’s MSMEs has been the shortage of raw materials, which are rather being exported than the finished products being exported. This has been alarming for MSMEs who are still struggling with shipment delays and goods being stuck for customs at ports. All in all, MSMEs in India have had a tumultuous year of subdued economic activity coupled with skyrocketing trade costs and most companies have had to explore either digitizing their business or adapt to new ways of doing business, largely driven by analytics. The burning question that needs attention is, “how does an MSME run the show from manufacturing to delivery and invoicing to real-time cost realization,” and the answer may lie in advanced access to working capital that is hassle-free and rewarding in the long-term.
Shift From Traditional To New-Age
The global race to deliver what the world may be seeking from South Asian nations besides China is fierce and India is at the crux of a massive volcano of opportunity. The competitiveness of the country’s MSMEs will decide if this opportunity is used or lost. While other determining factors get battled at the diplomacy and regulation front by the Government of India, the onus of delivering is largely on MSMEs and a tactful shift from the traditional to new-age is merited. In terms of working capital needed by MSMEs, it’s surreal to think mainstream credit financers such as banks would be interested in catering to the demands of an already “risky” business whose success hangs in balance owing to a range of unavoidable factors including freight rates, raw materials shortage and Covid-induced delays in shipments and deliveries. Non-banking financial companies too may not be the right fit to meet credit demands, which are proportionally big-ticket. The bright option that emerges is trade financing, which needs to be pre-understood to fully utilize the potential that is waiting to be explored.
Why Trade Financing
Three aspects that need comprehension before opting for trade financing include first, access to working capital via investors. The reason an MSME gets collateral-free working capital via a trade financing company is because of the gravity of the investors who back this capital. The global insight that a consortium of serious players who understand the nitty-gritty of the export cycle and the imminent benefit that awaits both the MSME as well as the country helps reduce significant time in the evaluation as well as the grant of capital. This becomes the tipping point that can make a shipment worth its value for the exporter who is combating aggressive competition from other efficient and cheaper markets such as Vietnam and Bangladesh.
The second is data-led analytics to understand demand & supply. It is almost impossible for a trader or an MSME sitting in a small town in India to self-evaluate what the market opportunities are and how they can be fully tapped. The diligent data analytics that helps trade financing companies decide which sector to pump capital in and at what value also aids MSMEs in making decisions based on real-time demand and accordingly meet the supply requirements. Without worldwide review led by data, sustained effort in the right direction is unachievable. At such a time post the coronavirus crisis, the most lucrative returns will be obtained via the right partnerships with the most technologically-advanced and focussed minds.
Third related to digital processing of invoices pre and post-shipment and factoring. The concept of physical billing pre and post-delivery of goods is not only redundant, it is time and cost consuming both of which are in shortage for an Indian MSME right now. Digitization of invoices makes the process seamless. More importantly, it facilitates factoring, a type of debtor finance in which a business sells its invoices to a third party at a discount. This is aimed at enabling the MSME to factor in its receivable assets to meet its present and immediate cash needs. Bringing dynamicity to trade is one of the core areas of trade financing and any MSME exploring it is likely to compete better with a global peer.
In the unprecedented times that the world is in, aiming to ensure guaranteed returns on a trade is a key element to conducting business. MSMEs in India can truly thrive in 2021 only if they understand the need to adapt and embrace what a new-age world has in terms of the offering. Indian companies have the will, what they need next is the vision to think big and welcome the evitable change with an open heart.
(This article was first published in The Financial Express )