Fat Tiger through its supply chain finance helping SMEs overcome cash flow uncertainty
SCF enables large corporations to use their relatively higher credit ratings to provide credit to SMEs. Smaller businesses can now obtain financing that they would not have been able to obtain otherwise
image for illustrative purpose
Fat Tiger may be bringing in innovation and versatility to the QSR space that currently inhabits the Indian market, but its co-founder and director has had experiences of successfully running automobiles (Chopra Automobiles), F&B (Millie's Cookies), defense distributor and supplier company - all in the MSME space, mostly, He knows exactly where the shoe pinches, when it comes to India's SME sector. Cash flow is one such pain area for the MSME and more so after the pandemic. Here is a new method which has come in handy for this segment to take care of this problem area. Supply chain finance (SCF), also known as supplier finance or reverse factoring, is a set of solutions that optimizes cash flow by allowing businesses to lengthen their payment terms to their suppliers while providing the option for their large and SME suppliers to get paid early. SCF is a type of supplier finance that helps both buyers and suppliers optimize their working capital by speeding up cash flow. In a way, it is a set of tech-based business and financing processes that lower costs and improve efficiency for the parties involved in a transaction. Speaking to Bizz Buzz exclusively, Sahaj Chopra, Co-founder and Director at Fat Tiger, explains the advantages of adopting this new credit finance method.
We all know that during the pandemic and immediately after that, small and micro enterprises (SMEs) had to go through a real tough time. What was the key problem? And if they have come out of it (which it looks like), have they adopted any new methodology?
Yes, the year 2020 has been a difficult year for India's small and medium-sized enterprises (SMEs), thanks to the break out of the Covid-19 pandemic. Due to an acute shortage of cash flow, many startups and small businesses have been unable to purchase critical supplies such as raw materials and spare parts. The overall drop in demand has made it impossible for SMEs to continue operating as usual. To top it all off, there has been a significant increase in the number of bankruptcies since the lockdown, which has only added to the market's sense of insecurity.
An increasing number of Indian businesses are now putting their faith in a relatively new credit financing method that promises to optimise working capital flow while allowing them to focus on growth. As a result, Supply Chain Finance, abbreviated SCF, has enormous potential for closing the large gap between invoice generation and settlement. It can assist small businesses in the post-Covid market in addressing cash flow uncertainty and strengthening supplier relationships.
As you mentioned supply chain finance (SCF) has more benefits than one for the SMEs, in particular, it must have the mechanism to improve liquidity, that being one of the critical problems…
Yes it improves liquidity. Extended credit lines of up to 120 days have been necessitated by the severe cash crunch being experienced by businesses on account of Covid-19. If the buyer faces a working capital shortfall, SCF can relieve the pressure on their accounts payable, helping them to focus on top-line growth.
What about stressed SMEs? Is SCF beneficial for the stressed SMEs as well?
Very pertinent point. Yes, it enhances credit financing options for stressed SMEs as well. SMEs in India have traditionally been viewed negatively by lenders due to their poor or non-existent credit history. Banks are understandably hesitant to take on additional risk, even as the volume of Non-Performing Assets (NPA) on their books remains high. SCF enables large corporations to use their relatively higher credit ratings to provide credit to SMEs. Smaller businesses can now obtain financing that they would not have been able to obtain otherwise.
SMEs more often than not cannot come up with collateral security and that acts as a deterrent for arranging finances…
With SCF, SMEs are no longer restricted in their ability to secure credit financing due to a lack of collateral. The pending bill serves as collateral for the bank's release of funds. Until recently, small business owners had to offer their personal assets as collateral to meet the lender's requirements. This improves small businesses' ability to overcome one of the most significant obstacles to running normal operations, particularly in the post-Covid scenario.
Besides collateral, cost of borrowing is the other key challenge or problem area facing the SMEs in this country. How does SCF take care of that?
The cost of borrowing in this case is very low. In India, the average interest rate on working capital loans ranges from 12 per cent to 16 per cent. While such loans are significantly less expensive than traditional moneylender financing, high EMIs can strain SMEs, especially when business is slow. In comparison, supply chain financing has interest rates ranging from 2-4 per cent, making it the clear winner when it comes to gaining quick access to working capital. When demand-supply cycles are uncertain, it is a much more sustainable form of business finance.
Being and staying competitive in a volatile, pandemic-hit market is also very important for SMEs…
Yes, you are absolutely right. And significantly, SCF provides strategic flexibility. Let me explain how. SME buyers can use SCF to source low-cost products from suppliers and increase their profit margins. Cash discounts offered by suppliers for prompt payment can also be substantial. Buyers can foster an ecosystem of preferred suppliers by providing financing assistance, thereby increasing their competitiveness in a volatile pandemic-affected market
Is there any other advantage or benefit that Indian SMEs can look forward to while adopting this new credit financing method-SCF?
Cash flow disruption is perhaps the most significant challenge that SMEs face today, making timely credit access even more critical. SCF enables businesses to shorten the sales cycle and pursue growth opportunities more aggressively. For lenders, it can play a critical role in restoring market confidence, resulting in increased credit volumes - and growth - across the board.
