How to cater and scale technology for a start-up in rapid growth

There are multiple stages in a start-up. At an early stage, most tech start-ups usually include two founding members – a business head and a tech head leading the validation efforts. Further down the line, we notice parallel and vertical streams of teams leading the initial growth of the company. It’s usually at this stage or after this stage, where the business has some solidarity to it and the focus on building tech for a large and scalable model begins. The following points made in this post have been laid out in view of a mature start-up.

Be Agile

Following an agile methodology for development is a no-brainer for any start-up. The environment is fast paced, catering to a dynamic business where release cycles are frequent. Often, the common pitfalls of this method also show a lack of emphasis on planning and documentation while customer expectations sometimes are not clear. To mitigate this, a hybrid of agile and waterfall approaches enables start-ups to move towards a mature business. To do so, the start-up must;

– Identify problems of the business

– Prioritize the need of the hour for the business

– Allow for high level architected solutions for each problem

– Build feature specs

– Execute in sprints (ideally 2 weeks) for maximum output to customers

Extensibility

Your business logic and data is your Intellectual Property. As a Fintech company, this becomes the most critical piece of software development. It is important to protect your data while also facilitating growth with the exact same data. How do you draw this balance?

Build your logic and algorithmic layer around your data and an external layer that does not directly interact with your data set. This permits external endpoints to be consumed by growth partners as well as reduces development efforts for building tech for internal teams.

Micro-services

Enterprise applications are often built using a monolithic approach or as a single unit. Although it’s a natural approach to development, it can be frustrating because of multiple dependencies on modular structure and deployment to the cloud also becomes a challenge.

In contrast, Micro-services architecture equips you to independently deploy services or pieces of software without large dependencies on other services. These services or pieces of software ultimately add up to become a single application while running its own suite of processes and mechanisms.

Additionally, in a Fintech setup, technology is built to cater multiple teams – both internal and external and having a micro-services architecture easily allows horizontal scaling.

Reusable code

In a start-up, it’s a good idea to prototype development. Prototyping facilitates quick delivery of a piece of software and a better understanding of future product development.

Post prototyping, it’s important to pick the right framework for a full-fledged and scaled application. This is where building code that can be re-used in multiple services becomes a factor of efficiency in development. Building custom libraries (back-end or front-end) and even choosing the right frameworks ensure ease of development across resources and knowledge transfer. A choice of using AngularJS as a front-end framework allows for creating directives specific to custom applications and promotes reusable components.

Build vs Buy

A classic point of debate and contention is always build versus buy. There are multiple points to consider while making such decisions in a growth stage start up to create a fine balance between the two.

Often, out of the box or integrated solutions provide quick solutions for increased productivity to a business need but come at several costs, such as pricing and rigidity of use. Sometimes these solutions are not compatible with existing software or custom solutions.

Custom-built solutions provide competitive advantages, builds intellectual property and fit a specific business need but also comes at several costs, such as time for development and uncertainty in product definition.

A hybrid approach can be an effective way of mitigating the disadvantages of build or buy approaches. At times, building on top of or integrating an existing product into your custom built solution adds greater value to the overall business product. An example of such a solution can be integrating a good workflow management tool into your custom CRM application.

Dev Pathi

Dev has been involved with startups for the past 5 years since he returned from US. He has launched several mobile apps that have been well accepted in the Indian startup scene.

In New York, he worked with Conde Nast helping them move their web infrastructure from an enterprise setup to an open source setup.
Dev manages the technology development initiatives at Capital Float.

More Related Posts

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How will the GST Impact Financial Services Sector in India?

The Goods and Services Tax (GST) has been the biggest tax reform in India since 1947. Analysts also expect that it will have a huge impact on various sectors of the Indian economy, especially the service sector. Of the segment comprising banks and non-banking financial companies (NBFCs), the fund-related, fee-based and insurance services will witness significant impact as a result of GST implementation and will see shifts from the way they had been operating earlier.

What is really implied by financial services?

The term ‘financial services’ has not been specifically defined by the GST law. However, to understand the implications of this tax on the financial services sector, we need to consider the supply of goods and services that involve the extension of credit support. These services include but are not limited to:

– Loans
– Lease
– Hire purchase
– Conditional sales
– Securitisation or assignment of receivables
– Acquisition or sale of shares and securities

The compliance towards GST can take some effort in the above fields because of the nature of operations conducted by banks and NBFCs concerning credit products, lease transactions, hire purchase, actionable claims and other funds and non-funds-based services.

The GST rate on banking services and services provided by the NBFCs has been raised from 15% to 18% with the execution of this reform from July 01, 2017 onwards. The GST impact on financial services may further be classified into the following sub-sections:

1. Network of branches to be registered separately

Before the implementation of GST, a bank or NBFC with operations spread across India could discharge its compliance on service tax through one ‘centralised’ registration. After GST regulation, these institutions will be required to get a separate tax registration for each of the states they work in.

As a destination-based tax, GST has a multi-stage collection system. In such a mechanism, the tax is collected at each stage and the credit of tax that was paid at the last stage is available as a set off at the subsequent stage of the transaction. This transfers the tax incidence to different entities more evenly, and helps the industry through improved cash flows and better working capital management.

2. Leveraged and de-leveraged Input Tax Credit 

Earlier, banks and NBFCs had been majorly opting for the reversal of 50% of the Central Value Added Tax (CENVAT) credit that they avail against the inputs and input services, while the CENVAT credit on the capital goods was given without any reversal conditions. Under GST, the 50% of the CENVAT credit that was availed for inputs, input services and capital goods has been reversed. This leaves banks and NBFCs with a decreased credit of 50% on capital goods, and in turn raises the cost of capital.

However, this can be counterbalanced by the advantages posed by operating one’s business in the new taxation scenario. A unified domestic market can help with more opportunities for expansion and reduced production costs enhancing one’s profitability.

3. Evaluation and adjudication 

The impact of GST on banking services and NBFCs will also be felt in terms of evaluation procedures. Service tax was assessed by the particular regulators in the state where a branch is registered. In addition, every registered branch of the concerned bank or NBFC had to validate its position for the chargeability in the respective state and provide a reason for utilising the input tax credit in various states.

The GST assessment will involve more than one assessing authority, and each of them may have a different judgement for the same underlying issue. Although such contradictions can prolong the decision-making process for the financial institutions, the adverse effects of evaluation by one authority can be offset through decisions made by another assessor.

Impact of GST on banking sector – General services 

Banks in India have been levying service tax on most transactions enabled by their systems. These include but are not limited to digital fund transfers, issuance of ATM cards and chequebooks, and ATM withdrawals beyond a specific limit. With GST on financial services, these services will be taxed at the rate of 18% instead of the 15% service tax rate that was being charged earlier. For example, if you withdraw money from an ATM other than your bank’s ATM after exceeding the “free transaction limit”, you are typically charged Rs 20 plus a service tax, which comes to around Rs 23. With the imposition of GST, this amount will go up to Rs 23.60.

However, deeper analysis reveals that such an increase in cost should not be considered a negative GST impact on financial services sector. In the long run, banks will be able to transfer the advantage of input tax credit – enabled under GST – to the customers. Furthermore, services like fixed deposits (FDs) and other bank account deposits that were outside the circle of service tax will continue to remain outside the GST ambit.

A major advantage of GST on financial services and other sectors is that it is a transparent tax and has reduced the number of indirect taxes. It integrates different taxes and ensures that the tax burden is fairly divided between different entities involved in the system. In addition, GST is essentially technology based. The advanced software systems used in its calculation and filing works will reduce the chances of manual errors and will lead to better decision making.

Capital Float too experiences the effect of GST on banking and NBFCs. We find ourselves in the 18% tax bracket, and we maintain our statutory lending policies including low-interest rates and quick disbursement of funds. Taking into account the GST impact on financial services sector, Capital Float will continue to provide the best credit solutions to its clients, customized to adapt to the changes brought by GST on SMEs in various sectors.

Oct 24, 2018

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Impact of the Union Budget 2018 on MSMEs

MSME is an important sector for the Government, as it maintains a relentless focus on increasing GDP and employment. Formalization of MSME businesses is being undertaken on a massive scale after demonetization and the introduction of GST. The core focus of the Union Budget 2018 indicates the Government’s commitment to continue strengthening MSMEs from the base of the sector.

Lending a Hand to MSMEs

With the Union Budget 2018-19 in play, the refinancing policy and eligibility criteria under Micro Units Development and Refinance Agency (MUDRA) program will be reviewed to encourage easier financing of MSMEs by NBFCs.  The Government has set a target of ₹3,00,000 crores for loans to be provided under MUDRA in 2018-19. Specific measures to address NPAs of MSMEs were promised to ease the cash flow challenges that they face.  The tax burden on MSMEs has been reduced by axing tax rate to 25% for those with revenues of below ₹250 crores. Recapitalization of PSU banks will add an additional ₹5,00,000 crores to the available lending pool this year. A unique Aadhaar-like identity for each enterprise is planned for streamlining business identity. This measure can enable Fintech lenders to process eKYC of enterprises swiftly and offer working capital finance in a matter of minutes. Furthermore, the Finance Minister Arun Jaitley called out Fintech lenders in his speech and emphasised their importance in financing the development of MSMEs in India.

Operation Greens

A five-year tax holiday was granted to Farmer Producer Organisations (FPO) with a turnover below ₹100 crores to encourage post-harvest value addition. The Government has also promised a Minimum Support Price (MSP) crop of 1.5 times the production cost to farmers. In addition, several proposed measures related to the farm sector include – funds to develop agricultural markets, improve agricultural logistics, enhance rural connectivity, and distribute Kisan credit cards to farmers in fisheries and animal husbandry sectors. This sets the precedent for these sectors to create a digital footprint, facilitating them to receiving customized finance in the future from digital lenders like Capital Float.

The Finance Minister proposed to extend the tax relaxation period to 150 days to footwear and leather industry to boost the creation of employment at the grassroots level. An additional ₹10,000 crores have been allocated for fisheries, animal husbandry and aquaculture industries.  This is expected to aid more micro-segments in being included in the formal financial ecosystem

New Financing Avenues

In a bid to help start-ups and venture capital firms to attract foreign investments in niche areas, the Government will evolve a coherent and integrated policy for ODI (Outward Direct Investment) and hybrid instruments. The basket of eligible FDI instruments will be expanded to include these under certain conditions.

Taking a Position on Crypto Assets

The Government has reiterated that it is illegal to transact using cryptocurrencies, though it does not categorically state that it is illegal to hold these assets.  The Government will intensify its efforts to eliminate illicit transactions in cryptocurrencies. It also proposes to explore the use of Blockchain technology to enable more transparent payment mechanisms to boost the digital economy further. These efforts certainly forward the shift of business transactions from being paper-based to paperless, while adding clarity on which methods of digital payment are acceptable and which aren’t.

MSME – Key to India’s Industrial Growth

MSME sector plays a key role in India’s journey towards becoming the 5th largest economy in the world. Several measures to ease cash flow have been proposed which are likely to make lending more readily available to MSMEs. With Fintech lenders leading the charge on the financing front, MSMEs can be expectant to receive timely credit support to actualize their business ambitions and achieve remarkable growth this year. Several micro-segments are also expected to be absorbed into the formal financial system, as Fintech lenders like Capital Float continue to champion for the cause of financial inclusion in India.

Oct 24, 2018

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Impact of GST on Your Day to Day Business

The Goods and Services Tax or GST goes live on July 1, 2017, but the process of consolidation and enrolment has already begun. Aiming to standardise indirect taxation in the country as far as goods and services are concerned, the GST will have a multi-fold and direct impact on the workings of businesses, whether large corporate houses or SMEs.

A quick overview of GST will help businesses understand its implications play to its advantage.

About GST

GST is a standardisation of the indirect taxation regime across the nation, leading to subsuming of many earlier state and central tax regime laws. Now, goods and services will be taxed under four basic slabs—5%, 12%, 18% or 28%—creating a new norm in indirect taxation. Traditionally, indirect taxes have had a very significant impact on businesses, particularly on their working capital. A number of taxes such as VAT, Service Tax, Excise Tax and others have resulted in huge contributions to the government and in effect, a huge expense for businesses. The hidden nature of indirect taxes, often spreading across multiple stages of the product cycle, has been a significant drain on working capital. Typically, the proportion of indirect taxes is significantly more in tax collections in developing countries, as compared to developed countries, where the share of direct taxation is significantly higher.

With the implementation of the GST, tax buckets are set to change, as also the way of doing business, as the cash outflow and timelines are about to be significantly affected. Working capital is the lifeline of a business, one that keeps it up and running. Especially for SMEs, it helps carry on day-to-day operations, which are critical to business continuity and success.

Here are some key GST changes that will directly affect your business and working capital flows.

  1. Input tax credit changes: As per the existing taxation system, any tax paid on a business expense that is not directly related to taxable sales is not available as credit. For example, any tax paid on advertising expenses will not be available as credit. GST has a new concept called the “Furtherance of Business” under which it allows credit of any kind of input for business to be “used or intended to be used in the course of or for the furtherance of business”. Now, a businessman can claim credit for tax paid on advertising services as well, giving the businessman significant leeway. The positive outcome is that cost of operations will greatly reduce, and net margins will increase, thereby bettering the working capital flow of the business, and perhaps the line of credit in the future.
  2. Claims due to inverted duty structure: An inverted duty structure is one where inputs are taxed higher than outputs i.e., raw material excise duty is higher (12.5%) than finished goods (6%), leading to a situation where the excess i.e., 6.5% is unused and gets accumulated. Under the current regime, this excess is not refundable. With the introduction of GST, businesses can now claim the unutilized input tax credit accumulated due to inverted duty structure. This, coupled with a speedy claims process, is a boon to boost the working capital of businesses.
  3. Timeliness of input tax credit: Currently, the input credit that a businessman avails is not captured in real-time, or in other words, in line with the current tax liability of the supplier. With GST, the input tax credit amount will depend on the compliance level of the supplier, making it compulsory for the supplier to declare the outward supplies along with the tax payment.  In a way, you might be responsible for your supplier’s failure to furnish valid returns. This may mean a dip in your cash flows since the input credit tax that you have claimed will be reversed and you will be expected to pay interest too, apart from losing out on the credit. GST will thus mandate businesses to manage their vendors very effectively. Review your current vendors and continuously monitor compliance levels to avoid this concern.
  4. Advance tax payments: Under the GST regime, tax needs to be paid on advance receipt dates. This is a major change, since so far this was applicable to only service tax under the current system. Now, if an advance is received against supply at a later date, the tax is liable to be paid on the date of advance receipt. The matter becomes worrisome since even though the business pays tax in advance, it cannot be claimed under the bucket of input tax credit immediately. It can be availed only once the goods or services are received.
  5. Taxation of stock transfers: The current VAT rules do not treat stock transfers as “goods” or “services”. However, with the GST, this changes—stock transfers are included under the category of goods/services and are taxable. This change will directly impact companies’ cash flows because the tax is to be paid on the date of stock transfer, whereas input tax credit can be availed of on the date of stock liquidation. How the working capital holds up in the interim period can be a crucial element to maintaining the working capital levels of the company
  6. The impact of location in offsetting credit: The prevailing Service Tax regime allows for centralised, pan-India registration of business. As a result, there are no restrictions on availing input tax credit across locations. However, under GST, different state entities need to be registered separately. These will be under varying jurisdictions depending on whether they come under the Central GST Bill, Integrated GST Bill or the Union Territory GST Bill. There are certain restrictions to offset a Central GST tax with an Integrated GST tax and so on. This may create difficulties in offsetting tax input credits across locations. For example, you may not be able to offset tax liabilities of one state branch with another state branch. Your liquidity may not be useful, even though it is available, creating an undesirable working capital situation.
  7. It is clear that businesses will need to exert more caution as they transition to GST. A detailed scrutiny of current tax commitments and the impact of the four bills depending on operational locations must be done at the outset to ensure healthy levels of working capital. It is also recommended to explore opportunities for availing working capital finance, or options for a line of credit by looking for the latest financing products such as those offered by Capital Float. Our customised, innovative loan offerings include term finance and online seller finance among others to ease working capital woes that SMEs routinely face. Click here for more.

Oct 24, 2018