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The survival of any business depends significantly on its financial capacity, especially in times of crisis. Today, as the entire world grapples with uncertainty, MSMEs are among the sectors most affected in the aftermath of a global pandemic.
The sector, which employs around 120 million people, is struggling to ensure its continuity, mainly due to the collapse of global supply chains. Unfortunately, 25 to 30 million people from this sector have already lost their jobs or are experiencing wage cuts.
Understanding the weaknesses of MSMEs
Companies struggling to weather this crisis are facing a massive financial crisis. The main reason: they still follow the traditional method of payment by check. This means that they have access to money after 15-45 days of delivery of the goods or even longer if the invoice is processed. This naturally makes it difficult for them to manage even fixed expenses, including payments to vendors and staff.
What adds to their woes is the tedious paperwork that banks demand when it comes to lending to small and medium businesses, if they consider it. The reason? Poor or no credit history and lack of collateral in some cases.
At a time when we are already seeing a slowdown in sales, companies are sorely lacking in reserves to ensure the regularity of their cash flow. To get out of such situations, they look for hedge funds, pay high interest and end up falling into a debt trap.
To provide some relief, the government has introduced the moratorium (March-August 2020) for borrowers. Although it eliminated their burden of paying current loan IMEs only for a temporary six-month period, the magnitude of the blockage losses was insurmountable.
Considering the pain points, it is visible that most companies in the MSME sector have gone through a severe liquidity crisis and are struggling to raise finance or credit formally.
This is where fintech solutions come in.
Fintech: a ray of hope for MSMEs
As stated earlier, businesses need financing even for their day-to-day expenses before they receive payments from customers and suppliers. To ensure a smooth navigation in these uncharted waters, they need working capital solutions such as instant cash loans. These are easily accessible via the players in the fintech space, without the need for a guarantee.
As part of this new offering, fintech companies analyze borrowers’ payment and credit history through data-driven processes to understand their repayment capacity, before granting loans. Once approved, borrowers can withdraw money within days or sometimes instantly. This helps them dramatically improve their cash flow and helps them meet their unforeseen credit needs with easy repayment options.
Solutions like instant cash loans are not only closing the funding gap for small and medium-sized businesses, but also accelerating financial inclusion across India. Distressed businesses need more credit solutions to recover from heavy losses and regain health to ensure seamless operations in the new normal. To achieve this, more financial sector actors should learn and replicate this approach for the greater good of the economy.