Manage FinanceManaging CashflowsSmall Businesses

Cash Flow Challenges Faced by the MSMEs and their Smart Solutions

Cash Flow


Sufficient & sustainable liquidity is one of the essential elements and basic need of every business. All businesses need appropriate and well-planned cash flow to establish a harmony its day to day and sudden operations.

For the already established conglomerates and large/Mid- cap entities it may not be so difficult raise funds and maintain cash flow steady but for MSMEs it is so challenging to get the sources of funds and raise the capital for maintaining cash flow in line with their business needs which makes them helpless in spite of having unique business models and ideas. Because, though there is plethora of loans with various banks, not all the businesses are deemed eligible to get those loans on concerned norms. Despite the fact that MSMEs forms more than 40% share in GDP of our Country, lack of capital results in unstable cash flow for them which restricts the MSMEs’ growth and expansion possibilities.

Major hindrances faced by MSMEs while raising Funds

Lack of credit history and stringent norms

Many times, banks or NBFC rules are so stringent that sometimes it is really become cumbersome for small units to satisfy the tedious norms and cope up with them. Generally, MSMEs are new and they lack enough credit history as per banking regulations so their creditworthiness becomes questionable for the financial institutions and hence the banks mostly hesitate to give them loan. For instance, it’s definitely difficult to get loan for a person willing to open a grocery shop as a start- up than a well-established telecom company.

Lack of Foundation

As the MSMEs are in an INFANT STAGE, they need strong support to maintain cash flow for their Preliminary Expenses like machinery and Day to Day Operating Expenses such as wages, Bills and many more. Mostly MSMEs do not have such business background in both, experience as well as financials matters.

Absence of adequate Knowledge and Facilities

Sometimes, due to naiveness in the sector or business, MSMEs lacks adequate information regarding the procedures or facilities available for them. For example, many startups and upcoming businesses are totally unaware of Schemes such as PM Jandhan Yojana, Mudra Loan and various micro Finances so they struggle in primary phase itself for long time which can be utilized productively otherwise.

Not having enough Collateral Securities

Many times, even if the business model as well as business ideas are very unique and may be very promising but still if the MSME is unable to produce a Collateral Security within stipulated time limit then Banks or concerned financial institute will extend loan to the company due to the non-fulfillment of loan sanctions.

Imbalanced Cash Flow Management

As we all know, early stage of business requires too many initial expenses and compared to them, income inflow is generally yet to start gradually, the situation become ‘Catch 22’ dilemma because one can clearly see pile of overheads against the income. Here it calls the need for better cash flow management and proper guidance to cope up and keep going in such situations however unfortunately many a times both elements are missing leading to disruptions and closure.

What are the Smart Options to conquer above obstacles?

Fin-Tech Companies

There are many Fin-Tech companies which help and guide MSMEs with proper know -how and most importantly provides all facilities at one shop place including guidance for creditworthiness assessment to getting short term finances. The entities also offer proper system know how about how to track receivable and payment invoices.
Capital Float, MobiKwik, BankBazaar, Instamojo, Ledingkart, CreditMantri and Fino Payments Bank are some of the leading Indian Fin-Tech companies.

Merchant Cash Advance (MCA)

MCA is a facility which one can avail against their ‘Receivables ‘and it can be easily repaid through credit or debit cards settlements by paying a small amount of EMI on daily basis. In any initial Cash crunch situation, MCA can be best measure to run the business smoothly. Some finance companies offer this facility with affordable amount of fees. In its process a financing company will advance you cash in exchange of a percentage of your daily debit card and credit card sales plus fee amount, directly from the processor who clears and settles the credit card payment.

The MCA fees are determined through a term known as a ‘Factor Rate’. Multiplication of the factor rate by the advanced amount will be the resultant total payback amount. Many providers form partnerships with Payment processors and then take a fixed or variable percentage of a merchant’s upcoming credit card sales.

For Instance: Company A needs a Merchant Cash Advance of Rs. 50,000, so technically it agrees to sale a portion worth Rs. 60,000 of its future credit card sales for the immediate need of Rs. 50000. The offering finance company will collect its margin fees, it generally varies within the limits of 15 to 35%, from each credit card or/and debit card sale of company A till the entire amount of Rs. 60,000 is being collected.

Bajaj Finserv and Telr India are the leading MCA facility providers in India. On the Global platform, SKY Bridge Funding, Main Street Finance Group, National funding and more are the major players which offer MCA services. Hotels, Beauty parlor, Auto garages, hospitals and more are the few examples where the MCA is more appropriate measure.

Factoring or Supply chain Finance

Many NBFCs have Distributor Finance Programs which to fund an MSMEs supply Chain. It includes financing or factoring the receivables of the company.
Factoring is a financial service or system for raising capital immediately. In this the entity sells its Bills Receivables to the third party at a discounted rate to raise the funds immediately. The Third party is called as a Factor. The factor offers a mutually decided amount to the needy entity, after deducting discount value from the total invoice value. Generally, the discount Rate ranges between 2% to 6%.
In factoring, the factor does not disburse full amount of the invoice to the company. It releases only 75 to 80% amount of the value after deduction of the discount. The remaining amount acts as a collateral security and known as the Factor Reserve. It is paid by the factor to the company when, it receives the payments from the seller company’s customers.
Advance & Maturity, Undisclosed, Recourse and non-Recourse, Domestic, Cross Border, Full Factoring are some major types of the factoring.

Invoice Discounting or Bill discounting

Invoice discounting is also a popular type of short-term capital raising measure. It offers an immediate fund for operating capital expenses against the invoice raised to the customers. Invoice Discounting is a system by which mean the seller party recovers an amount of invoice or sales from the financial intermediaries even before its due date. The institutes offering such facility charge a specific amount as a fee for their service.
Many NBFCs, Banks or financial institutions consider Bill Discounting as their business vertical.

Optimizing Alternative Finance Resources

Venture Capitalist (VC) or Private Equity firms also offers financial support to the MSMEs. Sometimes many wealthy investors, financial institutions or investment banks offer funding to the start-ups when they see expected potential in the venture. Such potential is called as a Potential to Breakout, that is when the price of the asset moves above a resistance area or below a support area. The process is called as a venture capitalization. The funding may be in the combination of Debt and Equity in mutually agreed proportion of both the parties.
Additionally, Private Equity function also offers you the opportunity to raise quick working capital. In private equity service, the interested financial institution invests in the company which is not publicly listed or traded but have the hidden potentials of growth.
So, instead of fully depending on banks or NBFC’s it’s always a wise decision to opt for other feasible and appropriate alternatives.

To summarise

Though there are many hurdles in establishing MSMEs, they can be conquered with the help of smart capital raising ways such as MCA, Factoring, Bill Discounting, Venture Capital and Private Equity.
Proper guidance, alternative measures, feasibility analysis and productive efforts can definitely help to the MSMEs in considerable proportion. If the small-scale entities go with the proper flow of procedure such as Fin-Tech guidance, seeking of adequate procedural know how, information about government and alternative facilities available, it can become hassle-free to run their business successfully with the efficient and smooth Cash -Flow system.

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