Why SMEs should go digital

The Digital SME

If you’ve been reading the papers over the last year, you must have come across the words ‘digital’ and ‘SME’ on almost a daily basis. From the the ‘Digital India’ initiative by the government to cut red-tape, bureaucracy and dare I say even corruption, to the KPMG-Snapdeal report on how going digital (or selling online) has helped SMEs increase their turnover and profitability, there’s a lot of excitement in India about SMEs going digital.

Over the past few months I’ve been asking myself a couple of questions:

  • Do SMEs really understand what “going digital” means?
  • Do SMEs know what are the benefits of going digital?


Going Digital: What does this really mean?

Depending on which report you read, SMEs can sell products online for prices between ₹1500- ₹3000. So does this mean the SME has now gone digital? I think not. This just means the SME now sells its products online and therefore has a greater reach, which to be honest is a great achievement in itself, but the SME still has to adopt technology internally for it to go truly digital. A modern digital SME is powered by solutions that are spread across multiple functions: From Customer Acquisition to Risk Management to Operational Efficiency to Enabling/Empowering Workforce. Adopting new age technological solutions internally will allow an SME to achieve scale and more importantly operational efficiency at a lower cost. Some of the largest start-ups have managed to scale globally because they have successfully done this. Firms like Practo, AirBnB and Uber for example, have successfully incorporated technology in their internal processes which has allowed them to grow globally at a rapid pace.

The rapid growth of technology has given SMEs:

  • Access to Enabling Infrastructure through increasing device penetration and an enhancement in internet connectivity.
  • Availability of economically feasible enterprise solutions and services along with a thriving mobile applications (apps) ecosystem.
  • Customers who have adopted technology and ecosystems that are allowing this adoption through key initiatives.
     

Going Digital: Key Benefits

4 areas are likely to be directly benefited if SMEs adopt technology:

A) Customer Acquisition

Technology can be leveraged to access clients in distant geographies and create a greater visibility among target segments. Personalisation in engagement and customer relationships, for both new and existing clients, can be managed in a more efficient manner. The immense data that is captured using technology will allow SMEs to develop customer intelligence which will then allow them to optimize sales and engage with various ecosystems to open new sales channels.

B) Operational Efficiency

Automation and streamlining of core processes will allow the SME to become more efficient, reduce wastage and utilize resources in an optimal manner. This will allow them to enhance the customer experience and optimize their supply chain management through better visibility and control over logistics. With efficient processes in place, SMEs will be able to choose suitable potential partnerships that will fit their internal processes and not cause any disruption,

C) Workforce Enablement

Technology can go a long way in identifying workforce shortfall and identifying key areas of skill development needed within the organisation. A number of digital tools are now available for employees to collaborate and for the SME to monitor employee productivity. Web based solutions for skill development and training for employees will help the SME ensure that employees are empowered with new tools and concepts on a regular basis

D) Risk Management

With use of technology comes the responsibility to protect the information the firm has gathered. Data Security becomes paramount for customer/employee data as well as the company’s financial information. Digital solutions for preventing such leaks would strengthen the organisation. Technology can also be used to safeguard and monitor physical assets through the use of surveillance, asset control and tracking solutions.

There has never been a better time for SMEs in India to “go digital” and leverage technology to incorporate financially feasible solutions.

Akshay_Sarma

Akshay joined Capital Float after completing MBA from Judge Business School, University of Cambridge. Following 6 years with Deutsche Bank across various functions and geographies, he opened a French Italian bistro in India. At Deutsche Bank, Akshay worked across risk management, structuring derivative products, trading Indian government bonds and structuring and executing assets financing trades.
Akshay manages Capital Markets at Capital Float.

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Credit changes hands as Digital Lending takes shape

A wave of change is sweeping across the nation, transforming accessibility of credit at an individual and institutional level. As stated by the World Bank in 2014, nearly 47% of Indian adults are disconnected from formalized financial systems, increasing their dependency on informal credit channels. The nature of these informal channels and the environment fostering their sustenance make these modes of funding exorbitantly expensive. These channels typically provide immediate funding but debilitate the borrower’s sustainability and competitiveness in the long-term. Usurious rates of interest, loans terms disconnected from business fundamentals and delayed-decision making shackle entrepreneurs armed with ambition.

The apprehensions involving credit-access notwithstanding, SMEs find themselves lucratively placed in the timeline of the Indian economy, wherein Governmental and capitalistic forces are aligning in order to further SME progression in the country. Centre-led initiatives and evolutionary processes set up by tactful corporates are becoming building blocks to facilitate economic development through SMEs.

SMEs central to India’s economic development

The Government of India has identified the significant role SMEs play in shaping and developing the economy. The ‘Make in India’ initiative was launched last year to attract foreign and local investment to the country’s manufacturing sector. SMEs are required to participate actively in making this initiative a success. The pro-manufacturing stance of the Government provides these businesses with the opportunity to scale and grow at an accelerated pace.

India destined to become an e-commerce superpower

Similarly, e-commerce companies in India are in the golden phase of technological advancement. According to Goldman Sachs, India’s e-commerce market will cross the $100 billion mark by FY20[1]. A study by PWC indicated that the e-commerce industry is expected to grow from $16.4 billion in 2014 to $21.3 billion in 2015[2]. Alibaba.com, the B2B division of the world’s largest e-retailer Alibaba Group recently announced that India is the second most important market for the company globally [3]. A whopping majority of the e-commerce space presently comprises of e-tailing and e-travel companies. Alibaba is likely to provide B2B companies the much-needed platform to establish their presence.

Credit now just a click away

Several factors could hinder SMEs from expanding at a geometric rate. Possibly the most critical of these is credit. Companies are queuing to alter the perception and approach to credit, with many organisations attempting to transform finance from a function to a service.

A recent article on YourStory mentioned that over 500 financial technology start-ups in India have received $1.4 billion in funding since 2012[4]. These are not merely in the credit services sector but also include companies in the mobile payment services sector. With 90% mobile phone penetration in the country and smartphone sales expected to reach 500 million units in the next five years, digital engagement with consumers will be higher than ever before.

Pioneer with purpose

Capital Float, the pioneer in digital lending for SMEs in India, is spearheading this digital revolution. We understand the crippling effects collateral-based loans have on business progression and the inherent anxiety they cause. Our expertise in big data, decision sciences proficiency and technological prowess gives us the edge to provide specially tailored financial services to small and medium businesses across the country. Competitive interest rates make us relevant and digital platforms increase our reach. Gone are the days when SMEs toiled to acquire credit. Digitized processes have bridged the gap between the borrower and capital, the two now being separated by a few clicks of the mouse.

Digital Lending will gradually replace conventional credit channels. In response to the altering financial landscape, traditional organisations are revisiting their work-flows and are attempting to revitalize processes to become felicitous options.

SMEs are evolving at a rapid rate and it’s not surprising that access to finance too is changing simultaneously.

Author – Rajath Kumar, Marketing Manager, Capital Float.

[1]http://economictimes.indiatimes.com/industry/services/retail/indias-ecommerce-market-to-breach-100-billion-mark-by-fy20-goldman-sachs/articleshow/49532128.cms
[2]http://www.pwc.in/assets/pdfs/publications/2015/ecommerce-in-india-accelerating-growth.pdf
[3]http://articles.economictimes.indiatimes.com/2015-12-08/news/68865727_1_indian-smes-alibaba-com-indian-sellers
[4]http://yourstory.com/2015/10/digital-finance-revolution/

Oct 24, 2018

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SME Financing: A Variety of Options Available to Suit Your Needs

The 2017 Union Budget underlined the significant role that Small and Medium Enterprises (SMEs) play in the development of the country, in terms of industrial output, exports and generating employment. While SMEs contribute to the growth of the country, they face challenges in raising finances due to their size and their inability to provide adequate collateral.
Many SMEs have operational problems due to improper management and as a result, the lenders are wary about extending SME finance. To cover their risk, they charge higher rates of interest, insist on proper collateral, take extra efforts during due diligence, and even try to appoint their representative on the company board. Given the extra effort required when it comes to SME lending, traditional SME finance companies take a long time to disburse the loans.

Institutional route to SME finance

SME need loans to finance their working capital requirements. SME finance for working capital requirements traditionally starts with the establishment of cash credit, overdraft and working capital limits with the banks. SME finance is also required for purchasing assets and for expanding and scaling the business. For this purpose, term loans are secured from banks and SME finance companies for purchasing assets and for meeting other incidental expenses. Apart from these sources of finance, SMEs can also secure funds from the following traditional sources:

  • Export credit to finance the pre-shipment and post-shipment export-related activities.
  • Letters of Credit (LCs) and bank guarantees to facilitate trade and meet the performance and financial obligations.
  • Bill discounting where bills of exchange which are covered by LCs or bank guarantees are discounted by banks, NBFCs or SME finance companies.
  • Leasing where the banks, NBFCs or SME finance companies buy the asset on behalf of the SME and then lease it back to the SME.
  • Factoring and securitisation where illiquid assets are used to secure advances from banks, NBFCs or SME finance companies.
  • Venture capital investments from individual investors or companies.

Government impetus to SME lending

Recognising the issues faced by small businesses and their criticality to India’s development, the Government has initiated several measures to ease the credit availability for this segment.

  • The finance minister has set the lending target for SME finance at Rs 2.44 lakh crore for 2017. In other words the directive ensures that banks and financial institutions will disburse loans to SMEs collectively worth Rs 2.44 lakh crore through this year.
  • The Government’s Credit Guarantee Scheme (CGS) under the Ministry of Micro, Small & Medium Enterprises (MSME), which secures the loans given by banks to SMEs, now has an increased outlay of Rs 2 crore from the earlier Rs 1 crore.
  • The 2017 Union Budget infused Rs 10,000 crore of capital into state-owned lending institutions to promote SME lending.
  • SMEs can continue to avail of loans under the Pradhan Mantri Mudra Yojana, where SME finance is disbursed to small businesses as working capital loans or short-term loans. The amount ranges from Rs 50,000 to Rs 10 Lakh and no collateral is required as they are covered/secured by the CGS scheme.

Alternative SME finance channels

Rapid strides in technology are changing the banking and financial industry and several new channels of credit are emerging as viable alternatives for cash-strapped SMEs.
New age FinTech companies are using advanced technology to introduce new SME lending products that have quick and easy approval processes. Companies like Capital Float have made it easier to secure SME finance. Such new age SME finance companies have introduced online portals and mobile apps that can be used by SMEs to apply for and manage loans. They have simplified and shortened the loan approval process by using big data and analytics to evaluate loan applications.
New age SME finance companies like Capital Float have also introduced innovative financial products for customised SME lending. These new SME lending solutions include:

Collateral-free financing solutions: These are unsecured loans given by the SME finance companies to SMEs who cannot or do not want to provide any security. FinTech SME finance companies like Capital Float use technology to swiftly assess the credit-worthiness of the loan applicants and speed up disbursal so that a business owner can receive the loan amount in their account within 72 hours. Capital Float also has easy and flexible repayment terms which make the loan easier for SMEs to manage.

Merchant cash advances or credit card receivables: These unsecured loans or advances can be availed of by SMEs who use Point-of-Sale (PoS) terminals. The amount advanced is dependent on the monthly credit card sales generated on the point-of-sale machine.

Online seller finance: This is a working capital loan given to e-commerce vendors for managing their day-to-day operations and leveraging business opportunities.

Supply chain finance: In this kind of financing, the SME finance company liquidates the borrower’s invoices by paying up to 80% of the invoice value to the borrower.

Capital Float is one of the leading SME finance companies that uses FinTech to create SME-friendly credit options. It provides short term unsecured loans to SMEs, and a basket of customised financial products that cater to the needs of small entrepreneurs. These include online seller finance, supply chain finance, merchant cash advance, and Pay Later, which is a revolving credit facility.

Oct 24, 2018

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Budget 2017: Giving SMEs a stronger footing

SMEs play a crucial role in the economic development of India. They contribute to 45% of the industrial output, 40% of the exports and 42% of the employment in the country. Although these enterprises are highly significant to the economy, they are regularly challenged by policies, laws and processes In recognition of this, the Union Budget 2017 gave start-ups and SMEs a lot to cheer about.

Increasing Financial Viability with a Lower Tax Burden

Finance Minister Arun Jaitley announced a reduction in corporate tax from 30% to 25% for SMEs with an annual turnover of less than ₹50 crores. Moreover, the presumptive tax rate for SMEs with an annual turnover of up to ₹2 crores has been lowered from 8% to 6%. Both these measures would increase the bottom-line of SMEs. These enterprises work on low profits, and their survival is often threatened by even minor fluctuations in the business. The enhanced financial viability would increase the survival rate of SMEs.

At the same time, Budget 2017 has tried to align with the broader objective of increased digitalization. The proposed reduction in presumptive tax is applicable only for a firm’s gross receipts that are received via digital transactions. Also, no cash transaction above ₹3 lakhs would be permitted going forward. Both these measures have been designed to increase transparency and widen the tax base through digitalization.

Much Needed Breaks

Start-ups need maximum support during their initial years. From the next fiscal year, start-ups would have to pay taxes for only three out of seven years, up from last year’s exemption limit of five years, if they recorded profits. This is a great opportunity for start-ups and the economy. While a huge percentage of start-ups fail, these enterprises are responsible for introducing the most innovative products and services. The tax break announced by the Finance Minister would give start-ups a better fighting chance of survival and encourage more innovative ideas to be executed well.

Loans, Financing & Funding

The Finance Minister doubled the lending target to ₹2.44 lakh crores for the next fiscal year, making more credit available to small businesses to finance their working capital needs. Prime Minister Narendra Modi had already announced, on December 31, an increase in government credit guarantees for SMEs from ₹1 crore to ₹2 crores.

The FIPB (Foreign Investment Promotion Board) is to be abolished in the upcoming fiscal year. This would significantly liberalize policy related to FDI (Foreign Direct Investment). This is expected to boost retail and ecommerce in the country. Mr. Jaitley mentioned that further FDI relaxations were under consideration.

Most traditional banks are unwilling to give loans to SMEs due to the fear of defaults. Tax concession on provisions for non-performing assets (NPAs) and capital infusion of ₹10,000 crores for state-owned lenders would make loans more accessible to SMEs.

To encourage more investments into start-ups, the condition of continuous holding of 51% voting rights has been relaxed for carrying forward of losses by start-ups, provided the founder remains invested in the business.

Building on Digital India

While saying the almost 125 lakh people had adopted the BHIM digital payment app, the Finance Minister announced two new schemes – cashback for merchants and referral bonus for individuals.

Aadhaar Pay, the merchant version of the Aadhaar Enabled Payment System (AEPS), is to be launched shortly. This app would enable consumers to make payments without using cards, e-wallets or even mobile phones, since the merchant’s device would be linked to an Aadhaar biometric reader. More than a billion people in India already have Aadhaar cards, and this system would make most financial transactions simple, fast and traceable. It would be a boon for raising loans, enabling fintech lenders to link repayment to payments received by the SME.

The government would be targeting ₹2500 crore digital transactions in FY18 through BHIM, Aadhaar Pay, IMPS and debit cards. The Finance Minister indicated that banks would have to introduce 10 lakh new point-of-sale (PoS) terminals by March and 20 lakh Aadhaar-based PoS terminals by September, allowing more digital transactions, which would enhance financial inclusion and transparency.

Infrastructure

For the upcoming fiscal year, the Finance Minister announced a step-up in the total allocation for infrastructure development to an all-time high of ₹3.96 lakh crores, including increased allocations for railways, road and shipping. Infrastructural development eases a huge bottleneck faced by SMEs in transporting their goods to other regions in a timely and cost-effective manner. Better infrastructure would give confidence to SMEs to expand their markets farther and reduce wastage and spoilage during transportation.

Moreover, the roll out of GST (Goods and Services Tax), which the Finance Minister indicated was tracking as planned, would further increase the ease of doing business in other states.

An allocation of ₹10,000 crores towards the Bharat Net project was announced. This would increase access to high-speed broadband across India, facilitating communication and allowing SMEs to reach out to clients located in various corners of the country in a cost-efficient way. The geographic scale achieved will help SMEs to break physical boundaries and leverage bigger opportunities for growth.

The latest Union Budget comes as a respite for start-ups and SMEs. The strengthening of these businesses would play a critical role in India’s transition to becoming an economic superpower.

Oct 24, 2018