Cash flows are the life blood of a business. Irrespective of the size, scale or nature of a business, it's critical to maintain a fine balance between cash inflow and outflow. And deficits, if any, must be met, or else the survival of the business is under threat.

Ensuring a steady supply of cash is not easy, and for small businesses, this problem is even more acute. Insufficient cash translates into delays in delivering current orders and the inability to take on new ones. To add to it, uncertainties like Covid can cause payment delays impacting SMEs more.

A survey across 800 SMEs to understand the severity of the cash problem revealed that small and medium businesses need at least 15 lakh crores of invoice funding annually but only a negligible portion of it actually gets financed.

To find out why this happens, let’s break down the gaps in current supply chain financing and understand how modern age instruments like invoice discounting can give businesses the infusion of cash that they badly need.

Cash credit, also known as an overdraft, has continued to be a predominant credit option to fund working capital for many businesses and constitutes about 70 per cent of the total bank credit. In fact, in India, asset-based loans, or collateral loans, have been popular as a funding option. However, there is inherent bias in the manner these loans are offered. These loans are designed to favour the rich, or rather asset-rich businesses, and are far from being customer-friendly.

Besides asset-based loans, the government also set up the TReDS platform to allow the auctioning of trade receivables by micro, small and medium enterprises (MSMEs).

The TReDS option

TReDS is the electronic platform that facilitates the financing and discounting of MSME trade receivables through multiple financiers. These trade receivables may be dues from corporates and other buyers, such as government departments and PSUs.

Here, the vendor uploads the invoice on TReDS after which it gets accepted by the buyer, that is, the anchor or the enterprise. Based on the final bid accepted by the buyer and the vendor, the discount rate gets processed by the financier. TReDS settles this trade by paying the vendor after debiting the financier. Once the payment is processed, we proceed to the due date of the invoice, when the amount is repaid to the financier.

Probably the biggest disadvantage of the TreDS platform is that only MSMEs can participate as vendors. And while there is no restriction on the buyers, the type of financiers is limited. Also, these financiers have certain limits with buyers which restricts the extent of credit that can be provided to vendors. While TreDS is one option, it cannot fully meet the needs of the businesses.

One, TreDS is limited to MSMEs. Two, it may not be able to optimise and fully leverage increased intelligence around supplier compliance the way highly digitised systems can. Three, with TreDS, anchors cannot use their treasury cash to discount MSME invoices. Fintech firms offer better access to all forms and types of businesses.

Accelerated digital adoption, a highly digitised supply chain, GST proliferation, significant e-invoicing adoption, and improvements in automation and self-service capabilities along with integration with Enterprise Resource Planning (ERP) systems are the perfect recipe for Invoice Discounting to take off in a big way.

India’s digitisation efforts have led to the creation of an ecosystem that is conducive towards developing platforms that calculate discounts dynamically. This is done on a sliding scale and is driven by days paid early.

Which means that technology allows variable discounts to be offered based on payable days which are reduced on the invoice payment date instead of a flat discount which does not take into account the number of payable days reduced.

The writer is Founder and CEO - Cleartax

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