Ship Now Pay Later, salve for cash-strapped SMEs?

India has close to63 million MSMEs. Together these firms employ close to 111 million people.MSMEs are also responsible for 50% of India’s exports and contribute about 29%to India’s GDP. The sector holds immense potential to propel economic growth, generate employment and boost India’s international trade. Characterised by low technology adoption and limited brand building, MSMEs have historically faced several obstacles in living up to their potential. These include challenges around labor, ease of doing business, lack of access to collateral and finance.

SMEs face huge challenges in accessing capital

Among these, lack of access to capital is one the most significant challenges for small and medium sized companies.  

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MSMEs require access to working capital to ensure smooth day to day operations, to build resilience against future risks and to ensure long-term investments for growth and expansion. It is therefore imperative for MSMEs to have a cash reserve as well as receive timely payments. However, delays in payment cycles and resulting cash crunches are a regular feature of day-to-day operations.This is especially true for MSMEs that are part of supply chains for large companies. MSMEs lack the bargaining power to demand better payment cycles and often bear the brunt of delayed payments. In fact, estimates suggest that MSMEs are owed an approximately $ 200 billion at a point of time. This number only accounts for working capital deficit faced by registered MSMEs in the country(accounting just 13% of the existing small businesses).
Imagine then the magnitude of deficit for the entire sector. Lack of capital not only results in operational difficulties, but it could also mean having turn away lucrative orders that offer payment only after production is completed.

One possible solution is to seek access to credit. However, access to formal finance, comes with its own set of challenges. Not only is there information asymmetry regarding available financing, but many SMEs also lack the expertise to navigate formal financial solutions or do not have sufficient documentation to qualify for the right solutions. Moreover, working capital loans are often offered at high interest rates and are not a viable option for micro and small enterprises. According to Jiten Arora, Venture Lead of Solv & Member at SC Ventures. “India has close to a $300-billion funding gap when it comes to micro SMEs. Getting financial inclusion is very important for this.”

Solutions to improve cash flow for SMEs

Solutions that ease demands on cash strapped MSMEs are important not just for easing immediate financial demands, but also for allowing MSMEs the leeway to direct cash towards incremental improvements in operations, allowing them to scale up.Merchant Cash Advances are one such option that has become available for retailMSMEs in the recent years.
These are essentially upfront cash advances to businesses against a portion of their future sales through debit or credit cards.

The rise of buy now pay later models

Another solution that is rapidly gaining ground is the buy now pay later facility. Retail consumers have been able to avail this facility for the last several years –think Amazon Pay Later, LazyPay, Simpl. This option allows you to pay for products purchased at a later date, either as a lumpsum or in easy instalments. In fact, buy now pay later (or point of sale financing) was the only unsecured source of lending that witnessed double digit growth during the pandemic. However, such financing has typically been limited to lower ticket values. Recently SOLV, an India B2B marketplace has extended the buy now pay later facility to MSME buyers and sellers on its platform. This allows small businesses that are already reeling under the impact of the COVID-19 related slowdown some financial respite as they can service their requirements even if they don’t have immediate access to funds.

Most buy now pay later services work through partnerships with new-age financing companies and non-banking financial institutions (NBFCs). These intermediaries provide easy repayment options to buyers while paying merchants / sellers upfront. There are several benefits for the financial intermediary - this is a way of increasing the amount of loans disbursed while also gathering data to evaluate a customer’s credit behavior without investing a lot of resources.  According to Alok Mittal, CEO Indifi Technologies, a digital business loan provider, “Not only will this [BPNL]accelerate the recovery process of affected SMEs but will also help us understand their underlying transactions and accordingly formalize credit for this critical part of the Indian business ecosystem.”

Ship Now Pay Later

The buy now pay later model has also found resonance with service providers. For instance, german shipping company, Hapag Llyod, provides a facility where customers can choose to ship goods while availing a line of credit. In Canada, this is done in partnership with PayCargo a payment solutions provider. Consumers can opt for ocean and sea freight by availing PayCargo’s service which makes up to $2.5million in credit available to them at an interest of 1% for 15 days. Customers can also opt for longer repayment cycles of 30 and 45 days.

The availability of a pay later option takes on additional significance if one considers the recent unprecedented rise in shipping costs. Exporters have seen a double digit increase in freight costs over the last two years. In fact, freight costs increased by as much as 15% in January 2022 because of port congestions, and bottlenecks in USA, Europe and China. Given this unforeseen rise in the cost of doing business, having the ability to pay after 15, 30, or 45 days can provide a much-needed lifeline for struggling MSMEs.

Cogoport’s Pioneering Solution

In a ‘first of its kind’ facility in India, Cogoport has introduced a Ship Now Pay Later (SNPL) option for SMEs to obtain instant digital access to credit for booking shipments. MSMEs need to undergo a one-time approval process to avail the facility. At the time of registration, customers are required to provide details like the company’sPermanent Account Number (PAN), Aadhaar, GST certificate, MOA/AOA and a few additional financial details.

Cogoport uses its proprietary Cogo score benchmarking technique to evaluate the credit worthiness of the consumer based on GST, SIBIL and its own transactional data. Cogo score leverages machine learning to assess historic values (credit, debt and repayment history)as a predictor of risk.  This reduces the burden on Cogoport’s partners to prove their creditworthiness. Moreover, customers can opt for repayments over 30, 60 or 90 days, which is much longer than standard BNPL cycles. Since SMEs don’t have to pay a large sum at once, they can improve working capital optimization and have better cash conversion cycles.

It is essential that the business ecosystem adopt more such solutions to ease the challenges faced byMSME, thereby allowing them to turn into economic powerhouses that can helpIndia achieve its vision of becoming a $5 trillion economy by 2026.