We explore the new and unchartered territory of Invoice Discounting, and how it can be the difference between growth and extinction for your organization. Read along to know more.
MSMEs, or SMBs as referred to by some people, are the ‘Growth Engines’ in any developing economy. And India, a country where opportunities for such MSMEs galore, is also an economy where there are significant challenges for Small and Medium-sized businesses to grow into flourishing, large-sized enterprises. From the usual cash crunch to the heated geopolitical climate, the seasonal and the unpredictable disruptions, apart from the Macroeconomic factors at play, indicate that the challenges are significant.
These ‘Growth Engines’ of the economy need a lot more support, nurturing and handholding for them to run, grow and establish themselves. They need to be protected from a number of threats that can be dangerous and might eventually spell doom for their very existence.
Amongst the most prominent of these threats, in the context of our country, is the acute lack of affordable credit facilities, closely followed by unprecedented disruptions and other uncertainties that might affect businesses.
Such is the magnitude of this lack of credit, that recent reports by the International Finance Corporation and Association of Chartered Certified Accountants (ACCA) estimated that Indian SMBs are looking at a credit deficit to the tune of an eye-watering $240 Billion.
But what’s causing this deficit? Turns out, there’s a number of reasons for this. For starters, these MSMEs generally do not maintain proper books to keep a track of their business documents, tax returns, transactions, etc., which makes it difficult for them to raise credit from banks and other financial institutions. An increasingly large number of these MSMEs are young, up-and-coming startups founded by individuals who do not possess a credit borrower history on account of their being first-time borrowers.
Due to the lack of the aforementioned, raising funds becomes a herculean task for these MSMEs and those managing them. As a result, these organizations are overly dependent on payment from their clients, who are typically large corporate buyers. Things go awry when there is a delay in payment from the buyers, which inevitably leads to a liquidity crunch for these small businesses before it becomes a full-blown crisis. This is exacerbated by the vulnerabilities these small organizations are privy to, such as the supply chain disruptions, market shutdowns, changes in consumption patterns across geographies, etc.
The Onslaught of Change, Innovation and Technology
Despite the Government of India introducing various schemes over the years to help the cause of MSMEs in the subcontinent, powered by inspiring national campaigns to supercharge the industry and accord them the status they deserve, these initiatives have, however, seen only limited success.
This is where Invoice Discounting comes in. As Traditional Sources of Financing could not cater to the needs and requirements of these organizations, it became imperative that the solution to their problems be sourced through modern, technologically forward solutions.
In theory, Invoice Discounting is a Supplier Financing Solution par excellence. While some might argue that Invoice Discounting existed for as long as MSMEs faced liquidity woes, the Invoice Discounting of today is leaps and bounds ahead of all other discounting methods that may have existed before.
Such solutions today are powered by cutting-edge technologies, leveraging them to provide unparalleled User Interfaces, improved ease-of-use and most importantly, are dynamic on both usage and pricing, thereby addressing the problem at hand a lot better than previous models of the concept.
Amongst the forefront of these Technologies is DLT (Distributed Ledger Technology), popularly known as Blockchain, which has found multiple use cases in this domain. For the uninitiated, Blockchain is a decentralized, digitally distributed database/ledger wherein a transaction, once recorded, cannot be edited/tampered with in any manner.
A Blockchain collects and retains information in ‘Blocks’, which are then closed and linked with previous blocks, forming a ‘chain’ and giving the technology its name- Blockchain.
That is, a Blockchain ledger stores information electronically in a digital format in order to maintain an extremely secure, decentralized record of transactions. This is precisely why cryptocurrencies are based upon, and extensively use Blockchains, and also why Invoice Discounting leverages the technology.
Invoice Discounting Platforms such as Xpedize also leverage Machine Learning (ML) and Artificial Intelligence (AI) based Algorithms to process huge volumes of data so as to assess the quantum of credit risk and fraud. These technologies are also put to use in order to design algorithm-based auctions that more accurately discover the ideal discount percentage and terms of payments, among others.
Thus, these platforms present factual data and evaluations to their clients to enable them to make more informed decisions, keeping in mind their liquidity status, financial goals and obligations.
Dynamism is perhaps one of the most important features of this form of Invoice Discounting. This could be attributed to the fact that Invoice Discounting of old did not pick up because it was not dynamic, and by extension, did not cater to the requirements of those who needed it the most. But most importantly, in today’s erratic, completely unpredictable business cycles, a flexible, dynamic system is required to enable MSMEs to survive whatever supply chain disruptions, currency fluctuations, geopolitical tensions or even pandemics (we’re still amidst the COVID-19 Pandemic) that might threaten their business.
In The End
Thus, a flexible solution that caters to all members of the supply chain, is efficient enough to keep their interests in mind while trying to create a win-win situation for all stakeholders is the need of the hour, and that is precisely what would help the financial crisis of Indian MSMEs in the long term.
With the technological advancements Invoice Discounting has made over the past few years, it seems like we have found a promising, viable solution to Indian MSMEs’ looming financial crisis- the credit gap that showed no sign of reversing.
This is where the Indian FinTech revolution found its origin. With new-age startups like Xpedize offering solutions catering to all the members of the Supply Chain by leveraging cutting-edge technologies such as Blockchain, AI and ML, age-old problems like the Great Indian Credit Deficit, which seemed daunting for the longest time, can now finally be solved.