MSME Delayed Payments: Bill Discounting Platform To End Cash Flow Crisis

Did you know an annual report on MSME in 2018-2019 stated that these enterprises contribute to at least 30% of the country’s output? The report also stated that the sector was responsible for creating 120 million jobs.

But like most other business sectors, MSMEs also struggle with delayed payments. As a result, they often find themselves in a debt trap.  As an entrepreneur, you can surely testify that getting rid of payment obstacles not only helps to boost cash flow, but also allows you to make a timely investment decision.

Since MSMEs play a significant role in the economy, the Government of India, with the help of the RBI, launched an online bill discounting platform – Trade Receivable Discounting System. The platform allows MSMEs to raise funds against their accounts receivable.

Wondering how this MSME-friendly set up works? Read on to find more.

Bill Discounting Platform – How It Works?

Take a look at these pointers below to understand how such platforms work in general –

• An MSME uploads an invoice on a discounting platform.
• The buyer accepts the uploaded invoice, post which it becomes a factoring unit. 
• The financier enters a discounting rate. Ideally, such a rate cannot be less than the MCLR rate fixed by the RBI. 
• Once a party decides to comply with the terms of purchase and rate of interest. 
• The bill discounting platform debits the financier, and within the next working day, it gets credited to the seller’s account. 

So, such a bill discounting platform helps integrate MSMEs, financial institutions, and buyers into a single platform. And once both parties, i.e. the buyer and seller approve the bill, the financiers bid on it and pay the seller.

Nevertheless, you must note that MSMEs are not required to provide any collateral at the time they sell account receivables. Also, in case of default, they are not necessarily held responsible for the buyer’s failure to pay on time.

This manifests that MSMEs mostly profit by selling accounts receivable on a platform like TReDS. 

MSMEs thus stand to gain immensely by selling their receivables on the TReDS platform. The rate of interest for a seller can fall to 8-9% on the platform, as against 12-18% from traditional routes. Moreover, in such a set up the risk of default passes from the MSME seller and remains between the financial corporate and bank. 

Bill Discounting Platforms And Bottlenecks

After Aadhaar-based KYC was stopped, the cost of joining TReDS platform has increased significantly. Now MSMEs are required to complete the KYC oriented formalities physically. All these procedures make the entire arrangement quite time consuming and expensive.

One may argue that this system facilitates a smooth cash flow for MSME and helps to eliminate the problem of delayed payment. Regardless, several loopholes prevent this platform from providing smooth service to MSMEs.

These pointers below walk us through some of the significant issues of this bill discounting setup –

• Large businesses do not register on TReDS. 
• A large chunk of transactions is carried out offline, delaying the payment process. 
• It lacks automation, which in turn fails to lower the transaction cost for MSMEs. 

Do you think effective automation will streamline this entire process? 

Rest assured that it will prove useful for MSMEs and will help them clear bad debts and collect outstanding due with much ease.

Other Approach – MUDRA

Besides TReDS, the government also initiated MUDRA to provide credit-related assistance to small commercial units. MUDRA has been successful in providing last-minute credit and has, in turn, helped both companies and lenders to avail growth opportunities. 

Other than these, another way to eliminate the loophole is to make it mandatory for financial institutions and SMEs to register on the platform. However, often due to the fear of disclosing client details and other valid trade-related information to competition, MSMEs hesitate to board in such channels. Besides this, the fear of losing a customer due to the direct involvement of buyers, and a short repayment term of 45 days prevents MSMEs from entering into this arrangement.

Regardless, we know how important it is to release tied-up capital from accounts receivable to maintain a smooth flow of cash at all times. But at the same time, availing a MSME loan is not an option for many entrepreneurs. 

So, as an alternative, a business can look into a more streamlined platform of invoice discounting and avail integrated cash flow solutions on time. Typically, fintech companies allow borrowers to access cash within 24 hours to 72hours* and help meet immediate requirements easily. To avail quick cash flow solutions, businesses have to upload their unpaid invoices to the financier’s portal and meet a few basic requirements. 

This way, businesses will be able to access funds and meet their related cash-flow requirements quickly. Similarly, with a little bit of innovation and encouragement on the part of government-backed discounting platforms, the prevailing loopholes can be eliminated. 

Bottom Line

There are several loopholes in the government-backed bill discounting platforms. However, it allows businesses to release their tied-up capital in invoices successfully. Nevertheless, suppose you are looking for a quick cash flow solution and a streamlined means of boosting working capital. In that case, you can opt for the invoice discounting service offered by the leading fintech companies.