Why Is Timely Financing For MSMEs’ Supply Chain Important?

Various sectors contribute to the total gross domestic product and the economy of India, of which MSMEs (Micro, Small and Micro Enterprises) deserve special attention. This important sector is responsible for contributing 29% towards GDP through national and international trade. Currently, there are 63.3 million MSMEs, providing the largest employment (110.9 million people) after agriculture. Despite its massive contribution to GDP, MSMEs often face a cash crunch to run operations. 

The Government provides formal credit facilities to these sectors; however, the biggest challenge that pulls them down is delayed payment, especially from large corporate buyers or organisations. Issues like this increase the financial hardships of MSMEs and force them to turn into Non-Performing Assets (NPA), which highly affects sustainability.

In such cases, invoice discounting can act as a saviour and provide small businesses with the required cash to run daily operations smoothly and ensure growth and expansion. Wondering how Invoice Discounting can help MSME owners? Read on!

Definition Of Invoice Discounting

Invoice Discounting or bill discounting is the simplest form of invoice financing. Here, business persons can sell their unpaid invoices to a lender against which they receive a cash advance, a percentage of the invoice’s value. 

Businesspersons can view Invoice Discounting as a short-term business loan where they pledge invoices as collateral. The lending institution pays business owners (here MSME owners) most of the money before their customers actually pay them.

Invoice Discounting is sometimes called a Confidential Invoice Discount as business persons continue to deal with customers without letting them know that a financial provider is working as an intermediary (unlike Invoice Factoring).    

MSME owners struggling to get timely payment from customers can utilise Invoice Discounting and resolve these issues.  

Importance Of Invoice Discounting In India

Besides knowing what is invoice discounting, entrepreneurs must know the need for the same in business. Here are some cases:

• Need For Invoice Discounting

Here is a list of reasons MSME owners need timely financing and Invoice Discounting to have the ability to provide so,

1. Obtain Capital Goods And Promote Sales

The post-COVID business environment is in a vulnerable state where most retailers/business persons complain about the short supply of cash flow. A successful business must invest in critical capital goods (such as manufacturing hardware) as well as in working capital to support sales growth. However, MSME owners cannot do the same with limited cash in hand.

Here, Invoice Discounting can help MSMEs by providing additional cash and the required working capital so that they can boost sales. The availability of cash enables businesses to make capital goods investments and ensure growth easily.        

2. Protect From Market Uncertainty

The healthcare crisis that the whole country has been facing since the end of 2019 led to the economic slowdown. Now, every sector is in the recovery period. Here, suppose a client moves back and is unable to place monthly orders, or a supplier fails to provide the required materials. In that case, the whole business operation can shut down, affecting everyone involved. 

In such cases, MSMEs need immediate financing that can provide instant cash to protect them from such insecurities without depending on a formal credit system. Invoice Discounting can give MSME owners the time and flexibility to search for new suppliers by selling unpaid invoices and receiving considerable advances. 

Invoice Discounting As A Saviour For Supply Chain  

The MSME industry comprises different sectors, and the working environment may vary from others. Let’s take the example of the textile industry. This sector is highly competitive as large businesses of the same category offer similar products at almost the same rate. Here, a small mistake, such as failing to provide/launch products at a pre-stated date due to a cash crunch or facing an issue that can take time to resolve, the particular business will lose clients and reputation in the market because competitors will grab the opportunity and flourish.

All these incidents can be easily avoided if MSME owners opt for Invoice Discounting. This invoice financing option allows businesspersons to cover short-term obligations and meet day-to-day operations. When all these activities occur seamlessly, businesses can fulfil their commitments, focus on product quality and quantity and efficiently manage the gap between demand and supply.

MSME owners willing to avail the facility of Invoice Discounting can rely on the leading integrated financial solution provider KredX. Here, MSME owners need not wait for several days for their customers to pay for goods and services. Instead, they can receive instant cash by pledging unpaid invoices as collateral and ensuring business growth.      

Bottom Line

Late payments have been a consistent problem for MSME owners. Earlier, MSMEs experienced trouble getting formal credit facilities; now, the issue has come down to payment inconsistency. This issue got intense when the pandemic hit the country. In such situations, MSME owners can find the ultimate solution with Invoice Discounting, which lets them avoid new debt and balance sheets yet get instant cash when required.