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Digital Supply Chain Financing – A Blessing For The MSME Sector

MSME suppliers can request early payments from their enterprise buyers at affordable discount rates, monitor all invoice discounting stages, and stay in control of their cash conversion cycle.

How important is the availability of hassle-free supply chain financing solutions for MSMEs? The last MSME census conducted in 2006-07 shows that more than 92% of MSMEs had no finance or depended on self-finance. Even in September 2019, there was an addressable credit gap of USD 397 billion (INR 25.8 trillion) and a 14% growth in outstanding credit. A total of 46% MSMEs reported cash shortage, 23% of MSMEs experienced temporary exit, and 12% of MSMEs experienced both — in the aftermath of the COVID19 pandemic. Digital supply chain financing is integral to protecting the lives and livelihoods of 11 crore individuals that the MSME sector employs and 30% of the GDP that the sector contributes.

The Impact of the Digital Divide on Credit Gaps with MSME Units

Digital integration in India’s manufacturing supply chain is less than 5% and is still lower for the MSME sector. MSME units depend on cash transactions. There is no digital footprint of cash transactions due to offline modes of commerce. Sales and profitability metrics are not readily available and verifiable. The lack of visibility into relevant metrics, under-reporting of cash transactions, and use of vanity metrics distorts the creditworthiness assessment of MSMEs. As a result, MSMEs face numerous challenges such as a requirement of high collateral, high cost of credit, procedural delays in credit disbursal and credit downgrading. This failure in access to on-demand credit increases MSMEs’ risk exposure to business cycles and negative supply side shocks like the COVID19 pandemic.

Solving the Credit Problem of MSMEs Through Digital Supply Chain Financing

A digital supply financing platform provides quick collateral-free working capital solutions to suppliers. MSME suppliers can request early payments from their enterprise buyers at affordable discount rates, monitor all invoice discounting stages, and stay in control of their cash conversion cycle. They can track the credit disbursal request, payment approval status, and final payment from the enterprise buyer or lender.

Creating a Visible Data Governance Model Through Digital Transactions

The first step is to switch from cash transactions that are offline to a digital workflow ecosystem that brings together lenders, MSME suppliers, and large enterprise buyers through the creation to deploy a transparent data governance model.

Enabling Digital KYC for Creditworthiness Assessment with Technology

The “Know Your Customer” (KYC) process used for creditworthiness assessment in B2C lending does not suffice in the B2B manufacturing supply chain space. Lenders need relevant cash flow based metrics like purchase order value and revenue streams to finance the manufacturing supply chain and keep the flow of goods going. A digital supply chain repository captures large enterprise buyers, MSME suppliers, and lenders together on the same platform for information sharing and collaboration to authenticate credit disbursal requests.

Supercharging the Credit Disbursal Process With Greater Speed

Credit disbursal delayed is credit disbursal denied. MSMEs are labor intensive and incur semi-fixed costs on wage bills of blue collar workers within a typical 30-day working capital cycle. While working with such short timelines, lenders and enterprise buyers can leverage the “one page view” of invoices enabled by digital financing platforms to respond with greater agility. Once lenders have access to metrics like procurement order value, project milestones, delivery schedules, and the real-time quantum of delivery of goods against the entire order size, they will be in a better position to disburse credit.

Data Analytics to Fund Orders and Not Wait for Invoices

One of the greatest benefits of pivoting towards a digital supply chain financing solution is that it enables a one-page view of all the transactions between an MSME supplier and a large enterprise buyer. It reduces the costs, time, and effort on the due diligence required by large enterprises for scrutinizing invoices and allows lenders to disburse credit on purchase orders. This historical data serves as a key determinant for shaping the strategic relationship between lenders, large enterprise buyers, and MSME suppliers.

Digital Supply Chain Financing is Both the Conscience and Cognizance We Need

There is a mandate for all stakeholders in the B2B manufacturing supply chain to build back better. Successful businesses grow and thrive only in societies that succeed. Digital supply chain financing will mean a higher volume of credit disbursal in a short period of time for lenders. For large enterprise buyers, it will imply greater control on their operating expenses. Most importantly, for people employed in the MSME sector, it will mean better lives and livelihoods. A shift from cash to digital is both the conscience and the cognizance that the B2B manufacturing supply chain needs in enabling next-gen financing for the sector.

Source: Business World

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