Supply Chain Finance – Solving Small Business Capital Problems?

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We have commented on this topic of Supply Chain Finance (SCF) many times, including recently, but readers should certainly be reminded of the importance that liquidity plays in the lifeblood of any organization, especially in the case of small businesses. In this post to the Dala Street Investment Journal, a COO of a furniture company in India provides perspective on this topic. The author claimed that MSMEs (Micro, Small and Medium Enterprises) employ 111 million people in India. We have also recently released some members to research in the US middle market alone (which has many definitions around the world) and it accounts for about a third of GDP, so 111 million employed by MSMEs in India may even seem a little light. The author insists on the importance of access to the SCF for these companies.

“However, banks limit their exposure to MSMEs due to the high cost of service and the risk of lending without adequate collateral. Credit risk assessment is complex for lenders due to a lack of structured financial information, historical cash position, repayment trend data, etc. For MSMEs, the direct result of this credit gap is a vicious circle of high costs, low profitability, stunted growth. , and an inability to withstand even minor economic shocks. An economic disruption caused by the COVID pandemic leads to an almost immediate tightening of lender credit conditions for the privileged few who have access to the banking system…Given the importance of MSMEs for economic growth, it is crucial to help them by removing working capital barriers to growth. Supply chain finance (SCF) is key to accelerating the growth of MSMEs. SCF refers to technology-based solutions to reduce financing costs and increase business efficiency for buyers and sellers in a sales transaction. It helps them by filling financial gaps and providing desperately needed cash.

Again, the author works for an MSME and the perspective is one we have shared in the past on the accrued benefits associated with supply chain finance; i.e. greater working capital efficiency, lower cost of borrowing (short-term loans secured by receivables, inventory or payables, depending on the type of arrangement and parties involved) and a series of stronger relationships throughout the supply chain. Modern digital technology makes all of this more accessible. The article deserves a quick read.

“Because SCF transactions are structured, lenders can onboard more partners as the documentation and underwriting process is simplified and takes less time. With advances in technology, everything from onboarding to disbursement and settlement, can be streamlined, making it easier for small businesses to advance cash without requiring significant resources or negatively impacting bottom line TReDS (Trade Receivable Discounting System) platforms allow MSMEs to obtain credit instantly highly subsidized from various banks and NBFCs.The SCF is a solution that would provide many benefits to MSMEs.It is pertinent to educate MSMEs and their pillars on these options to improve cash flow.

Preview by Steve MurphyDirector, Commercial and Corporate Payments Consulting at Mercator Advisory Group

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