How do supply chain finance start-ups help SMEs to establish their footprints globally?

Small and medium-sized enterprises (SMEs) in India contribute a third to the national GDP, comprising almost half of the exports, and employ a fifth of the country’s workforce in India.

During FY20, MSME exports surged 21.8 percent, and 31.9 percent from $143.9 billion during FY21 to $190 billion during FY22.

In a new normal world that emerged from multiple waves of the Covid-19 pandemic, an average SME absorbed shocks to demand, liquidity and labour. Taking cognizance of it all, the government has taken steps to enable SMEs to raise funds publicly and expand into international markets in the medium to long term. It has announced measures to share the immediate burdens faced by the SMEs by absorbing their credit risk, deferring their interest payments, and promoting local procurement.

However, despite all the measures, the slow pace of digital adoption remains a key reason why SMEs and MSMEs have underperformed relative to their potential.

In India, nearly 96% of SMEs are unregistered and approximately 94% of them are proprietorships. Consequently, these also happen to be usually unbanked and outside the realm of the formal economy.

To help bridge this gap and tackle the challenges business uncertainty may bring, emerging technologies are coming forth to make distribution smoother and provide access to capital. According to a study by KPMG and Google, digitally enabled SMEs can grow profits up to two times faster than offline SMEs.

For exponential growth, SMEs and MSMEs need to realize that dependency on domestic markets is no longer an option.

Interestingly, it wasn’t until globalization that India started to perform better as a country with good GDP.

But in today’s world, globalization has rendered the implementation of supply chain management and finance an imperative, especially for the SMEs that are usually not equipped to do it all or do it alone, and need to supplement their own knowledge with technology.

Apart from the inherent challenges of limited working capital and market reach, SMEs or MSMEs also struggle to perform due diligence because of their limited resources and capabilities leading to business limitations. In present times, companies in this sector can rely on supply chain management companies to help them with the process of e-documentation and reduce the cost and complexities of the document-heavy traditional trade finance instruments paving their path to an interconnected global economy.

When it comes to cross-border transactions the challenges don’t end just there. Small companies often suffer due to payment delays, more pronounced information symmetries, and disputes that become harder to resolve.

In many cases, an exporter expects payment before shipment and sometimes even before the purchase of raw material or production of goods and services. While importers on the other hand wish to hold the payment until the delivery of ordered goods and services.

Access to supply chain finance helps cut these constraints by opening up new possibilities for the SMEs to manage working capital and payment risk associated with international trade. Take for instance, ‘reverse factoring’, a financial technology solution that enables the supplier to receive early payment from the finance provider, minus a small fee and allows the buyer to hold the payment for longer. This frees up working capital for both the buyer and the supplier, while the finance provider makes money for every invoice that’s paid early by taking a small percentage of the amount owed, helping streamline the cash flow.

Technology is the backbone of a self-reliant company. SMEs that go digital will be better prepared to deal with changing consumer behaviour triggered by events like the current pandemic and recession as they will be able to continue to service customers as well as ensure supply chain integrity.

What the future holds

The SMEs and MSMEs not only need to be revived but also restructured for resilience since sluggish growth for this sector would mean slow growth for the Indian economy. Considering the sector’s contribution to the nation’s economy, improving the productivity of the SMEs is worthwhile.

As more tech start-ups enter the supply chain management space, it is vital that small and medium-sized businesses integrate technology into their business models and close the digital gap that has plagued them for decades.

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