SMEs may bank on alternate financing solutions into the future

Alternate financing solutions are fast emerging as a lifeline for millions of Indian SMEs. Moreover, the credit demand for digitized SMEs is estimated to cross $570 billion over the next five years. The digitized businesses in the country collectively have a potential credit demand of nearly $220 billion, of which $165 billion is serviceable today. Analysts opine that exploring digitally enabled models of lending is the way forward for SMEs to solve funding challenges. Meanwhile, the India Digital SME Credit Report 2023, released jointly by GetVantage and Redseer Strategy Consultants, estimates that this potential $220 billion credit deficit poses a roadblock to unlocking the economic potential of millions of digitized businesses. Even after an infusion of $53 billion in FY22 into the market through various channels, the current working capital deficit stands at nearly $112 billion. This is even as projections are that digital SMEs will double in the next five years, implying that there will be corresponding credit demand increase. Little wonder therefore that alternate financing solutions like revenue-based financing have emerged as a lifeline for SMEs. It is likely to grow to a $60bn plus opportunity by 2027.

It does not require any rocket science to understand that such a large capital deficit will hinder new-economy and emerging businesses from innovating new products, creating jobs, scaling operations and building efficiencies. The issue, therefore, will have to be addressed without any further delay. Going by the Redseer study, small businesses account for 90 per cent of credit demand but continue to struggle to raise capital, owing to poor business metrics, limited assets, and uncertain growth projections. If the current economic and regulatory climate continues, this gap is likely to widen significantly over the next five years. This assumes significance in the wake of the fact that India is home to 64 million MSMEs, which contribute to no less than 30 per cent of the nation’s GDP. Although the sector is a crucial growth engine for the country, it is riddled with challenges such as limited digitization and strained access to capital that inhibits growth. Nearly 12 per cent or 7.7 million MSMEs are digitized and businesses that have been able to shift part of their operations online have taken advantage of new economic opportunities, cost efficiencies and achieve scale.

Quite interestingly, while raising capital has always been a challenge for SMEs, the formal lending systems comprising public and private banks have only been able to service 30 per cent of the overall demand. The supply gap has opened up vast opportunities for NBFCs and third-party lenders, such as revenue-based financing platforms and trade financiers to serve the growing market. As a result, 40 per cent of the overall capital investment into the SME market went to digitized SMEs (12 per cent of the total number of MSMEs). The existing and projected capital deficits represent an unprecedented opportunity for alternate-financing platforms, NBFCs and traditional financial lenders (Trad-Fi) like banks to collaborate and catalyze economic growth by prioritizing compliance, governance, inclusion and innovation. At present, the share of alternate finance is only five per cent, which can touch 11 per cent in the next five years, mostly because of the various alternate-financing platforms.