SMEs in India usually have to wait for more than 30 days to receive payment for services and products offered to their clients. However, these payment practices are only holding back business growth. Any delay or late payments could turn fatal for these small firms, as it can hinder an SME’s ability to expand even when they are making good sales. SMEs rely heavily on cash flow for business operations, which include non-negotiable expenses like making payments to employees and purchasing inventory. Chronic late payments risk the SME’s efficiency in the supply chain. Not only that, it makes planning for future expansion difficult, where the SME is unable to conceptualize the future income and expendables required to make good strategic decisions.
Most of the valuable time for the business is spent in chasing the money owed. In fact, many a times, these businesses avoid chasing payments to keep up their good relations with clients. However, this practice ultimately harms the SME, which often survives on razor thin profit margins. One bad month without receiving payments can create a huge difference between the business’ success and failure. SMEs need consistent cash flow that doesn’t fluctuate extensively.
Limited Business Financing Options for SMEs
One of the most important problems small or medium-sized enterprises face is the issue of financing. Unable to fund themselves, SMEs need to have a good financing partner to take care of their immediate needs, when their bills are not being cleared. In general, traditional banks do not like giving small loans, as they rely heavily on asset-based finance that are held typically for six to 18 months to generate any sort of interest income. Even if they do, the bank’s stringent eligibility criteria and requirement of collateral prevent SMEs from being able to claim a good loan amount. Banks usually take 2-3 months even to let SMEs know where their loan application has been approved, that too after making multiple visit to the bank.
Short Term Loans to Support SMEs Cash Inflow
The most effective steps an SME should take in terms of improving cash flow is adopting a payment model that encourages and emphasizes recurring revenue. In the absence of this, they can opt for FinTech lending, which provides easy and swift commercial financing to SMEs, without the need for extensive paperwork and collateral. In fact, FinTech companies, by using cutting-edge technology in the loan application and approval processes, have revolutionized the financing of working capital for such businesses.
FinTech lenders have designed highly powerful algorithms to speed up the underwriting of loan applications. In addition, determining the potential of the business and checking the credentials on the applicant are being done seamlessly by FinTech lenders. This revolutionary technology has encouraged more SMEs to come forward and take business loans from organized channels for funding their crucial requirements, saving time and effort. Moreover, short term loan from FinTech lenders can come in handy due to their varied repayment options, to help minimize the debt burden for the business owner.
The five financial products offered by FinTech companies to support the right inflow of funds include:
- Term Finance: SMEs operating as manufacturers, traders, distributors or service providers need immediate funds to finance their working capital needs in order to expand and diversify their business. FinTech companies provide term loans, as unsecured business loans, to help businesses retain positive monthly cash flow.
- Online Seller Finance: Businesses that sell products online can use their online sales as a useful medium to get short term working capital loans. Some FinTech lenders have tied up with online marketplace giants to provide quick and customized capital funding to SMEs selling online and aiming at expansion, where the repayment of the loan can be made from the receipts from online sales on these leading marketplaces.
- Pay Later Finance: FinTech lenders are offering a rolling loan product providing a line of credit to small businesses from which they can make multiple drawdowns within the sanctioned limit and repay the same to restore the balance for further use. This financial product is highly beneficial for businesses like small shop owners, travel agents, distributors and B2B companies in meeting their immediate expenses.
- Supply Chain Finance: SMEs often work on credit, where they wait for more than 30 days for payment. In such a situation, their outstanding invoices and bills can help them gain access to cash in the form of a loan against accounts receivables or invoices. This revolutionary financing option pumps funds into the business, where an SME can receive up to 80% of their total bill value.
- Merchant Cash Advances: This short term loan is specially meant for SMEs for whom a part of the revenue comes from debit and credit card swipes. Point-of-sale machines, other than offering the merits of cashless transactions, become instruments for availing working capital finance in this case. FinTech lenders have partnered with multiple point-of-sale (POS) card machine vendors to help SMEs access customized working capital solutions.
FinTech companies’ use of technology has made loan processing simple and highly efficient, where the complete loan process, straight from the application to the disbursal, can be completed in a matter of two to three days. This easy access to business loans in India in the form of term loans has given small and medium businesses new hope for accessing sufficient funds to capitalize on lucrative business opportunities.