Gaps in working capital credit availability & high cost of capital for SMEs / MSMEs

All businesses, small or large, often face liquidity mismatches or working capital shortages. When new orders are received, when firms are poised for expansion or when input costs shoot up, businesses may not have enough liquidity to meet their short-term obligations. Lack of optimum working capital is a concern not just for the corporates but also for their potential buyers, sellers and lenders. This is where credit comes in handy.

However, the gaps in availability of adequate working capital credit for smaller enterprises is a worry – both for the SMBs and for the larger corporates, which are dependent on the smaller firms to keep their supply chain running efficiently.

Large enterprises are looking for more suppliers and from multiple locations to bring down their reliance on any single source. They are also trying to hold more inventories as a contingency measure for any unexpected events. But the pains of selecting the right enterprise partners and providing access to easy credit for them, as felt acutely during the pandemic lockdowns, remain unresolved. Financing for inventory continues to be the need of the hour.

Having optimum working capital is crucial as it ensures that business operations are not interrupted, profits are maximized and the Return on Capital Employed is boosted. While traditional means of financing like Overdrafts and Cash Credits are conventional and limited, several new financing options like supply chain finance and invoice discounting are available today to help businesses to access funds and support their working capital needs. They bring down the need to avail loans with tough-to-pass eligibility criteria. However, the interest rates are as high as the traditional options, limiting small businesses and their growth ambitions.

At a time when the Covid-19 pandemic has exposed the increasing instability of the global supply chain and the impact of the Russia-Ukraine conflict has eroded the confidence in traditional systems further, there is a definite cause for concern as regards easy availability of credit to SMBs. A recent report by ‘India Ratings’ said, ‘the relentless macroeconomic shocks may lead to a 28 per cent increase in demand for working capital loan by companies, taking it to Rs 11.2 lakh crore this fiscal.’ This increase, compared to Rs. 8.7 lakh crore requirement in FY22 – right in the middle of a war, rising commodity prices and a falling rupee – is a definite concern for large enterprises as well as their distributor/retailer network.  It can have a direct impact on their cash flows and profitability.

According to the report, commodity-intensive sectors will face higher working capital requirements given the massive spike in commodity prices. Among the sectors that are expected to be affected most are capital goods, cement, chemicals, metals, food and energy. Russia’s invasion of Ukraine and its resultant ejection from the global economy compounded the supply chain problems in multiple sectors. Business leaders across the world are now worried for the stability and efficiency of the ecosystem.

In this scenario, there is still a huge scope for simplifying access to credit. After all, when credit access is simplified, SMEs can expand their business aggressively while giving enterprises who work with them the freedom to be ambitious and look at larger markets. At a time when the SME sector – employing about 40% of the country’s workforce & constituting about 30% of the GDP while forming the base of the economic pyramid – is taking rapid strides towards expansion, there is an urgent need to remove any and all impediments to growth.

Previously overlooked options like the use of dynamic tools that enable better and simplified decision-making and tech that facilitates easier access to credit, applying the basics of credit underwriting could improve the overall efficiencies in the supply chain. At a time when most transactions happen online, AI and Machine Learning can also be of great value to enterprises and to the whole business network, by simplifying processes. Undoubtedly, advanced tech designed for making B2B markets more adaptable by bringing all these elements together on one same platform is all set to lead this future of B2B transactions.

(The author is Mr. Raghu Subramanian, Founder & Global CEO, actyv.ai and the views expressed in this article are his own)