We frequently find ourselves in a situation where payments for one order are delayed, and we have another order waiting in the wings to be executed, leaving us in a catch-22 situation of whether to accept it or let it go. Bill or invoice discounting, which can be viewed as a loan against payment receivables that also works as a loan against an asset, is an easy solution to the problem.
This has its own advantages, such as no need for collateral, easy access, faster processing, and increased efficiency. However, in a recent conversation, the Finance Ministry expressed concern about PSU bill discounting, which is only about 4-5 percent.
To delve further into this topic and see how beneficial it is for SMEs, we held a webinar under SFS 2022 with three expert panellists to discuss the benefits and drawbacks of factoring, including Nitin Sharma, Chief Product Officer and MD SME Business, CredAble. Swapnil Kishore, Chief Risk Officer and Risk Head, KredX, and Ramesh Darji, CGM SIDBI (Retd) and Advisor GAME. Ashwin Chandrasekhar, Vice President GAME, moderated the session.
The overall cash conversion cycle is quite long, irrespective of the industry. The worst impacted segment is logistics with a delay over 120 days, meaning providers are paying for their expenses after 90-120 days. FMCG has the fastest cash-conversion cycle around 30 days in our platform, Nitin said.
SMEs have procured raw material and making goods to shift to the end buyer but still wait for the payment to realise, till the time it’s locked, they can’t procure any more raw material. It impacts their growth sometimes, and it’s come to a tight working capital cycle. While many SMEs are focused on making sales and market, some lose track of cashflow cycles, Nitin explained.
Swapnil of KredX added that they had done many studies and awareness campaigns to manage SMEs’ cash flow. However, SMEs with a shorter span of operations with strong cashflows have been unable to manage cash better.
Swapnil adds that most of the SMEs were focused on accounting revenue and cash flows, which is where they had seen its huge potential and tapped into and solved the cash flow problem. They were concerned with sales but more focused on collections and cash flows.
Ramesh Darji, former CGM at SIDBI, highlights that many SMEs don’t get access to working capital as they are already burdened with payment issues. It doesn’t serve the purpose even if they get it as time is of critical essence. Many enterprises don’t have negotiating skills, and so are PSUs not facilitating the payments on time are a part of the problem, Darji explained. The ecosystem has focused on how to solve the problem, but it hasn’t been able to as there’s a lot of lack of proper documentation and how it affects their balance of payments, he added.
Once they don’t receive the payments, it affects their statutory payments, and they struggle for working capital. It’s a vicious cycle unless payments cycles are revamped. PSBs and PSUs need to up their game on this part, Darji emphasised.