How dynamic discounts can be a win-win for MSMEs and large companies


The effect of COVID-19 on businesses continues to linger. While the pandemic has certainly acted as a catalyst for innovation across industries, ongoing bottlenecks and restrictions are impacting the ability of businesses to stabilize, recover and grow.

Several companies have been negatively affected in terms of their cash flow and their ability to generate working capital. Late payments and a drastic decline in business have created a huge shortage of incoming money, while the consumption of money in the form of wages, rent and other expenses continues unabated.

The most affected companies are MSMEs. In May 2020, the Indian government announced six programs as part of the Rs 20 lakh crore Aatmanirbhar Bharat stimulus plan.

The three main programs were the Rs 3 lakh crore Emergency Line of Credit Guarantee Program (ECLGS) unsecured loan program, the Rs 20,000 crore subordinated debt for MSMEs and the equity injection of Rs 50,000 crore through funds of funds (FoF).

However, according to a recent study by the Consortium of Indian Associations (CIA), 88% of the 81,000 MSMEs surveyed have not yet taken advantage of these packages due to ineligibility or because they were unable to meet the strict eligibility criteria.

In fact, according to another LocalCircles survey, 59% of Indian startups and micro, small and medium enterprises (MSMEs) are expected to scale down, close or sell this year due to the second wave.

The main challenge is that Indian MSMEs are crushed under a mountain of debt. MSMEs are the backbone of suppliers to all major companies in the country, and as manufacturing and sales are reduced, new purchases and existing contributions are delayed or stopped altogether.

Between late payments, an increasingly conservative credit industry and inadequate traditional supplier financing programs, MSMEs have little response at this stage.

Ensuring that liquidity through banks and NBFCs reaches needy MSMEs has been a priority for government programs, beneficial seller finance programs are largely the purview of buying firms. These programs essentially provide advance payments to supplier MSMEs on contributions, reducing the value paid by a “discount”.

The buyer can realize some savings on his invoices. The discount is usually less than what the seller would pay in interest to get the same amount as an outside loan. When it works, it’s a win-win arrangement. However, manual deployment and rigid ‘one size fits all’ structures put in place by buyers affect seller adoption.

On paper, such a program is available to the thousands of MSMEs that make up a large company’s supply chain, but in reality a fraction of salespeople actually use such a program.

Discount rates that don’t work, manual negotiations that degrade relationships and a lack of seasonal flexibility to sign up or unsubscribe or just a few of the reasons for lack of adoption.

Modern programs must democratize access to working capital through modern dynamic updating.

In recent years, the flexibility of cloud native applications and the ubiquity of AI and machine learning have brought such programs into the 2020s. Modern “dynamic delivery” programs address many business challenges. scale for supplier funding programs.

A dynamic discount platform allows buyers to set up flexible, granular programs, which can be set up to meet the needs of specific sectors of their supplier base.

Suppliers can access prepayment when they need it and even choose their own discount rates. Among the current crop of large companies that form the basis for early adoption of these platforms, they have seen rapid adoption across their supply chain and a significant increase in supply chain resilience. to prepare for the post-COVID-19 era.

MSMEs that benefited from these programs increased their turnover by up to 25% during the lockdowns, were able to reduce book debt, increase production and operational scale due to greater availability of capital and overcome the uncertainty associated with COVID-19 with relative ease.

The ability to choose discount rates allows MSMEs to adapt to seasonal variations in demand and capital needs.

AI-based algorithms can predict MSME prepayment demand and provide quick to instant sanction on demands, and funds delivered within days, with no paperwork and no collateral.

The time for MSME recovery is now. Large-scale government programs and structural reforms help MSMEs significantly, but tend to take time for their impact to be felt on the ground. Digital prepayment programs can be set up in a matter of weeks, already tapping into existing cash and liquidity in the system.

After COVID-19, supply chain resilience and digital transformation are already high on the to-do list for many companies, and programs that also directly improve the plight of MSMEs must be put on the top of the list. list.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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