SME Finance
Practicable Buying to Profitable Purchase Model
In India’s economic fabric, Small and Medium Enterprises (SMEs) have an important role to play. An area with an assortment of 6,000 products, contributes about 8% of the GDP in India and facilitates 45% of industrial production and 40% of exports from the country. This seemingly small but vibrant and dynamic region has the potential to accelerate industrial growth and is indeed a facilitator and leading partner in the process of inclusive growth for India. But, somewhere these enterprises have to face challenges which not only stop their growth but also cut their wings while walking on the path of success. India has lagged behind in promoting the advancement of SMEs through financial assistance. Why? One reason we think is that only 6% of these enterprises are registered with the Registrar of Companies, while 94% fall under the category of unregistered enterprises.
Handling various processes like bulk procurement, movement of working capital, handling finance, customer satisfaction, compliance related activities, handling procurement etc. proves to be cumbersome for SMEs when all the activities have to be dealt with together. Usually these are businesses that run on low investment. A good cash flow and a good deal of working capital can encourage an entrepreneur to keep his firm afloat.
So how does an entrepreneur make sure his money is going well?
Dealing in Discounts
Getting the most out of every penny invested helps in getting the best returns. Creditors are happiest when cash transactions are on the table and will go the extra mile to make sure the deal closes as quickly as possible. Here that extra mile refers to offering attractive discounts, with deals like paying upfront and availing 10% discount are common. In other credit scenarios, retailers are urged to reduce the credit period through discount period offers. Here a creditor offers the slab option, the sooner you pay off your debt, the bigger discount can be availed. Consider:
Pay instantly and get 5% cash discount
either
Pay within 10 days and get 2% discount
If a trader wants to buy goods worth Rs.100,000/-, the available options are:
Advance payment availing cash discount: 100,000-5% discount = Rs.95,000/-
If payment is made after 15 days = Rs.100,000/-
If credit taken = 100,000-2% = Rs.98,000/-
Annual savings on account of advance payments availing cash discount = 5000 per month * 12 = Rs. 60,000/-
Volume Game
Another powerful means of keeping product costs at a minimum is through bulk purchases of goods and items used in production. Long term contracts with vendors are suitable if your business is stable and you have the foresight to set product pricing, plan ahead keeping in mind seasonal requirements and ensure product availability to meet consistent demand.
A retailer may strike a deal for a continuous supply of material for a few years at a competitive price. Payment terms can include quarterly or semi-annual installation options, ensuring that your flow of funds is controlled. A well planned and executed deal can yield excellent profits.
Another mode of bulk procurement is through intermediaries or agencies that are associated with several SMEs. They group their specific needs with wholesalers to crack quantity based deals. This nexus and continued trade results in competition for jackfruit for trade by wholesalers.
Today, with online access and connectivity, several platforms have emerged that promote bulk buying through the group method. Couples of enterprises with a common need for materials or goods, club together to make a wholesale deal with wholesalers. The result, elimination of middlemen, juicier deals for the retailer and higher sales turnover for the wholesaler.
All the above scenarios involve blocking of working capital. And as we know MSMEs face difficulties in that sector. The only option left is to take out a loan to increase your spending power to reap its benefits. But again, bank loans charge an interest rate of 10-19% on business loans. This reduces the value of the discount received, even if the average discount is as high as 8-10%, as in the above scenarios. The only means for the MSMEs to make the deal profitable is the availability of credit at low interest rates. This gap in demand has been noticed by some fintech start-ups, who have made business loans profitable with their expertise in technology and various partners in the area of lending. From taking loans in a few days to reducing interest rates to 1.5-3% per month, which is about 18% per annum. However, considering the negligible cost of transaction and ease of availing loan within 48 hours, these fintech companies have proved to be a boon to the MSME world. Getting such momentary advances from banks without insurance is awkward most definitely. Now entrepreneurs can be relaxed and confident while discussing big deals.
Conclusion
Today, there are a number of platforms that launch wholesale shopping in the wholesale and retail markets. The requirement is still the same, huge working capital is required. SMEs continue to face challenges, both financial and otherwise, that lengthen their path to success. Recognizing that many fintech start-ups have entered the lending space for MSMEs. Organizations like FlexiLoans, which provide working capital loans to these small enterprises, claim quick and easy disbursement of loans within hardly 48 hours. It is refreshing to see a paradigm shift in the way entrepreneurs are now pursuing business ideas with certainty and confidence. Keeping these developments in mind, MSMEs now have a very bright future and will be leading partners in the process of inclusive growth for India.