Digital Lending and Its Impact on SMEs in India

The growing entrepreneurship and start-up culture in India has increased the demand for flexible business loans to support such new ventures monetarily. However, funds that come through banks, government agencies and other financial institutions are not always easy to procure. The detailed paperwork, the long waiting times to get approval for the required amounts, and the high interest rates to be paid over an extended period deter many new businesses from approaching the conventional sources of working capital.

Propelled by technological developments, an alternative source of loans for small business has emerged in the form of new FinTech (financial technology) lending. In India, the FinTech market has witnessed a period of rapid growth in the last two years. As per reports by KPMG India and NASSCOM, it is expected to cross the $2.4 billion mark by 2020. Its lending model is driven by digital technology and is inherently different from the conventional approach that has been used by banks for years.

Most FinTech lenders specialise in micro financing and SME lending. The loan is granted promptly based on financial statements, bank transaction history and e-commerce transaction behaviour where applicable. As a leading player in the digital lending industry, Capital Float has already carved out its niche and is trusted by entrepreneurs who need quick loans to materialise the innovations in their business plans.

Why are SMEs shifting from conventional sources of finance to FinTech lenders? 

Credit underwriting has been a major challenge with regards to the SME sector. The loan officers in Indian banks still use outdated methods to determine the creditworthiness of a small business. Furthermore, the loans offered by banks are secured in nature, those that require the borrower to offer some collateral – such as real estate, gold, investment portfolio, machinery or stocks – as security. This prevents several enterprising ventures from availing finance even if they have good prospects to grow and the ability to pay back their small business loan on time.

A digital SME loan is comparatively easier to obtain. The FinTech lending structure is backed by the assessment of digitally uploaded documents. The creditworthiness is evaluated using big data, psychometric questionnaires and social media behaviour, in addition to the trading position of the concerned business. If the SME does not maintain a formal balance sheet, alternate documents throwing light on its prospects in the industry can be used to determine the creditworthiness.

The experience of procuring loans before the advent of FinTech revolution was not very customer-friendly. Borrowers had to fill in long paper-based forms, gather many documents in support of their applications and pledge an asset to the lender. Subsequently, there was a waiting period running into weeks before the small business loan amount was approved.

Digital lending companies have improved the user experience by leveraging technology to tone down the paper work and processing time. Just like retail shopping and online travel bookings, the capital market for SMEs also needed to evolve and move online.

Was there a need for this new source of small business loans? 

The emergence of FinTech sector for lending to small and micro enterprises is not only limited to India, but is a global phenomenon. An article published by Forbes has comprehensively analysed the case for this new source of business loans. The financial crisis of 2008 had left the banking sector with almost no scope for innovation. They were heavily regulated by new rules for lending and were urged to limit their risk by demanding for liquid collateral and Tier 1 capital. They also had to be more attentive than before to their back offices and compliance management.

Such changes encouraged finance-savvy and customer-focused talent pools to devise new ways, whereby technology could be leveraged to make borrowing easier. Digital lending services build a bridge between lenders and borrowers. There is a difference in the time taken to process the application, the underwriting process, the actual disbursal of the amount and the period for which the SME loan is granted. While adequate care is taken in evaluating the eligibility of a business for the grant, a FinTech company also ensures that there are no superfluous delays.

In line with the standards established by banks, an online lender must also ensure a high degree of transparency in the process of granting loans. At Capital Float, before a transaction becomes active, borrowers receive complete information on the rate of interest, the tenure of loan and any condition attached to the deal. There are no unpleasant surprises at the time of loan repayment.

Another advantage of procuring unsecured loans from a digital lender is that this new industry can adjust to changes more actively than conventional banks. With lower costs of underwriting using technology, lower rates of interest also become feasible.

Digital lending is helping a new class of business borrowers who have not been able to obtain funding from traditional sources. With an automated underwriting process and risk management, it has a lower operational cost and smoother loan processing. A major  of FinTech-based lending is the assessment of client’s credit worthiness. Unlike banks that use only income statements and formal credit history, a FinTech company gathers substantial data through social media and big data. What’s more, with a strong use of technology in lending, the focus on safety is also uncompromising. There are adequate measures to keep the customer details encrypted and secure. Moreover, they also facilitate tailored finance products keeping in mind the varying needs of different industry segments.

The underlying objective is to support promising entrepreneurs in getting quick funds and realise their new business ideas. Capital Float believes that SMEs can grow consistently if they have secure and quick access to funds. As the government continues to promote digital transactions through e-wallets, mobile-driven point of sale (POS) and Internet banking, the financial structure must also be modernised to give a further impetus to entrepreneurship and the ‘Make in India’ vision.

As a FinTech company, Capital Float has created a business model that is not limited by structural formalities surrounding banks and traditional lending agencies. Our aim is to serve client needs efficiently and help promising businesses flourish progressively.

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Bharat QR vs POS Machine: Which One Is Better?

FinTech is disrupting the very fundamentals of money management the world over, and India is no exception. With the Prime Minister’s focus, especially, on making India “digital”, a number of programs and schemes have been launched. In fact, many of the schemes have taken a cue from the private sector and have upped the innovation game to deliver a comfortable and convenient money management experience. From the point of sale (POS) machines to merchant cash advance to e-wallets, we are seeing a plethora of FinTech products and services change the way we pay. And this phenomenon is occurring across industries, whether it is the fast moving e-commerce sector or the heavy-duty manufacturing sector.

Consumers are at the receiving end of these changes and need to fast adapt to the new payment means. First it was a revolution of the plastic money, with cash bring replaced by credit and debit cards. This demanded the use of other paraphernalia, such as the point of sale devices at the checkout counters. Now, with niche FinTech innovators such as Paytm and MobiKwik, even the point of sale devices are not required. It is just scan and pay. The government has taken this ease of payment a step further by bringing to light the Bharat QR payment method.

What is Bharat QR 

Bharat QR is a payment process driven by a Quick Response Code or QR code. A user who has the Bharat QR-enabled bank application on his or her mobile phone can make a payment quickly, easily and safely. The best part is that scanning the machine-readable optical grid translates the bank account information without your having to swipe or hand over a card, making it extremely convenient! This is because the QR grid stores the person’s bank information. This is similar to using a Paytm or a FreeCharge or a MobiKwik e-wallet, the advantage being that in Bharat QR, payments are linked directly to your bank account rather than to a separate e-wallet. There is thus no hassle of transferring money to your Paytm wallet or MobiKwik wallet. Alternatively, the user can also access Bharat QR through the Bharat Interface for Money or BHIM universal app, which is a UPI developed by the National Payments Corporation of India (NCPI).

Currently, Bharat QR is available on the mobile applications of 15 nationalised and private banks, namely – Axis Bank, Bank of Baroda, Bank of India, Citi Union Bank, DCB Bank, Karur Vysya Bank, HDFC Bank, ICICI Bank, IDBI Bank, Punjab National Bank, RBL Bank, State Bank of India, Union Bank of India, Vijaya Bank and Yes Bank. It is also linked to VISA, MasterCard, American Express and RuPay cards. Its scale is expected to increase in the coming days.

A look at Point of Sale

Bharat QR is thus a leap ahead of the Point of Sale payment mechanisms, which were the mainstream payment devices used at most commercial and consumer locations such as shops and restaurants. The Point of Sale or POS terminal is a computerised replacement for a cash register that can process credit and debit cards. A customer swipes their card in the machine and enters the PIN number to verify and complete the transaction. The POS is installed at the merchant location, mostly by the bank that they associated with. Not only does the merchant bear the cost of the device and the installation, but they are also compelled to pay the issuer bank a merchant discount rate (MDR). This is a percentage of the transaction value. In a bid to boost cash transactions, the RBI had rationalised the Merchant Discount Rate (MDR) for debit cards. Accordingly, a cap has been introduced for debit card point of sale payments, capped at 0.75% for transaction values up to Rs 2000 and at 1% for transaction values above Rs 2000. However, it continues to be an expense for the merchant, and is often passed on to the customer by increasing the selling price of the product or service. Often, buyers may not even realise that they are being charged extra for the MDR.

Other payment instruments: e-wallets

The first leg of replacing the point of sale was the onslaught of e-wallets such as Paytm and FreeCharge. Although they operate on the same principle as that of scanning a QR code, they are somewhat restrictive because they require both the transferor and the receiver to have the same e-wallet installed on their smartphones. The need was thus felt for a faster and easier money transfer mode, which caused the Bharat QR to come to the fore, thanks to the design and development by NCPI.

Advantages of Bharat QR

The Bharat QR is a step towards financial freedom by means of cashless transactions. It relieves one from the hassle of swiping at the point of sale or of facing detection troubles with one’s plastic money at the point of sale. Because there is no requirement of a physical use of a card, the risk of data theft or security issues through tampered or cyber-compromised point of sale devices is also minimised. Costs are reduced from both the consumer and merchant viewpoints, since the need for expensive point of sale devices and their MDR charges is eliminated. A significant advantage of Bharat QR is its ease of operation; i.e., the buyer and seller need not download the same payment application to make the payment happen, unlike Paytm. This is because the Bharat QR is directly linked to a single bank account. It poses a logistical relief, since businessmen now need not shuffle between different wallets and track their credits and debits – a tedious task. Moreover, the money transfer happens instantly because Bharat QR uses an IMPS service. Bharat QR truly has the potential to create a FinTech revolution.

It is clear that Bharat QR paves a convenient way ahead for paying and receiving funds. It is a great idea to get started on this universal tool. As a merchant, you must register with your banks to get authorised to receive payments through Bharat QR. Link your bank account to the BHIM app and generate your unique Bharat QR Code, take a print of your QR code and stick it onto your payment counter to get started.

Oct 24, 2018

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Impact on Retailers in India after 2018 Union Budget

The Union Budget for FY18-19 was much anticipated, owing to reasons more than one. The first full-fledged financial plan after the introduction of GST and the last one by the Narendra Modi-led government, the most significant event of the Indian financial year is over. With the national polls looming in, the Union Budget rolled out by finance minister Arun Jaitely was favourable towards agriculture, rural development, social infrastructure and digital transformation. However, international mobile phone companies, bond investors, equity servicing institutions and the defence sector are at the not-so-advantageous end of the spectrum. In general, this year’s Union Budget has been a shift from the typical stance of the government that all segments need equal attention.

An industry segment that sees clear growth opportunities is retail. Amidst public opinion that the budget had not mentioned the retail segment, the various provisions have subtle repercussions that will help widen the scope of consumption. Consequently, this will have a long-term impact on retailers, where they can reap benefits from consumers with a higher expendable income.

Here are the key provisions of the Union Budget for FY 18-19 that have relevant implications for retailers.

  • Reduction in Corporate Tax
    With regards to taxation, the budget has declared a reduction in corporate tax to 25% for companies with an annual turnover of up to Rs 250 crore. This accounts for almost 99% of the companies in India and would have an impact of Rs 7000 crore on government finances. As only 250 companies have a turnover above the threshold value, this is a significant reduction in terms of the business turnover cutoff of Rs 50 crore that had been announced in last year’s budget for the same tax bracket.
    This move has resulted in a decrease in the tax burden for small and medium businesses, who can now use these additional funds to purchase inventory or machinery, expand their premises, hire new employees or for marketing activities. In case it does not cover your entire expenses, retailers can also avail easy business finance from digitally-enabled FinTech lenders who provide customized credit products like Merchant Cash Advance.
  • Increased Investments in Digital India
    Lack of investment in digital infrastructure by the government has always been a pain point that has deterred the productivity and development of startups and small businesses. This is especially true for the e-commerce sector, as rural India is the driving force behind its growth. This year alone, e-tailers recorded a three-fold increase in the number of shoppers in small towns compared to metro cities.
    Under the massive Rs 3,073 crore Digital India Program, over 5 lakh Wi-Fi hotspots will be set up to provide broadband access to 20 crore rural citizens in over 2,50,000 villages. This opens up an avenue for individuals in rural India to harness the Internet for trade, banking, logistics and even to avail formal finance from digital lenders. E-commerce retailers can use this opportunity to its fullest, as 55% of the 185 million active consumers are predicted to be from rural India by 2020.
  • Changes in Personal Taxation
    A welcome move for the salaried middle class, this budget proposed a standard deduction of Rs 40,000 for transport allowance and medical reimbursement. While this may seem irrelevant to retailers, the impact of this allowance does indeed affect them. As personal income increases, so does the disposable component. Consumer behavioral studies ascertain that the disposable income is equitable to spends on retail. Thus, the re-introduction of medical and travel benefits is a favourable budget impact on retailers.
  • Refinancing for MSMEs
    The micro, small and medium enterprise (MSME) sector plays a major role as India progresses towards becoming one of the biggest economies in the world. Despite contributing a staggering 15% to the country’s GDP with a high market share of 40% towards employment, these businesses have an unmet credit demand of $ 400 billion.
    Acknowledging the fact, the budget declared an allocation of Rs 3794 crore to the MSME sector for credit support, capital and interest subsidy on innovation. With this reform 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. This impact of the budget on retailers opens plenty of avenues avail formal source of finance in a timely manner.
    A unique Aadhaar-like identity for each enterprise will also be implemented for streamlining business identity. This measure can further enable Fintech lenders like Capital Float to process eKYC of enterprises swiftly and offer working capital finance in a matter of seconds.

Oct 24, 2018

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How Short Term Loans Helps Small Businesses in India

A competitive environment works as a catalyst for growth for businesses, large, medium or small. Small businesses in India have been flourishing in a disorganized market for a while now, capitalizing on trends and changing consumer preferences. Yet one of the challenges they have to deal with is the lack of timely funds, whether by way of short-term business finance or investment in technology or infrastructure for scaling up. The struggle to get affordable financing has resulted in many Small and Medium Enterprises (SMEs) failing to realize their full potential.

This scenario is changing for the better. Term loans offered by online finance companies like Capital Float are your new-age finance options for seizing business opportunities that come your way. A trust-worthy financial partner that you can rely on, Capital Float has helped  enterprises boost their profit margins with convenient short-term business finance options. While some businesses require high liquidity, some may not; but no enterprise can work effectively without adequate cash flows. Restrictive lending policies, inflexible collateral requirements and slow disbursement times offered by formal financiers are of no help to SMEs.

Term loans from online lenders offer a way out of crippling interest rates and the chronic cycle of debt. Read on to find out why it makes sense to seek short-term loans in India.

Easy application procedure

As compared to traditional banks, online lenders such as Capital Float offer the convenience of filling out a 10-minute application form from anywhere, anytime. Digitally uploading required documents translates into an easy and hassle-free process. Given this day and age of instant connectivity, this isn’t a tough task; but going through the multiple layers of process at a conventional bank is.

Prompt approval

Apart from a laborious process of submitting umpteen documents and heavy paperwork, it is likely that a conventional lender will keep a small business owner waiting for loan approval. Compare this to a situation where applicants receive instant approval in minutes. Short loans are the lifeblood for a business. Meeting a smooth supply chain, daily payments, urgent expenses and several other unforeseen expenditures are part and parcel of business operations. Thus lack of liquidity can have ripple effects on many aspects of a business. Through quick approvals for term loans, online lenders ensure SMEs avert such crises with short-term business finance, available practically at their fingertips.

Not just fast, friendly too

Unless SMEs have some collateral to offer, turning to conventional lenders for term loans might be futile. Traditional banks are highly inflexible when it comes to scanning an applicant for short loans. Public Sector banks require a business to be running for at least three to five years to be eligible for a loan. The same holds true for private banks, traditional NBFCs and moneylenders. This is where new-age fintech lenders make a difference. Far more customer-friendly, and digitally enabled, lenders such as Capital Float provide Small and Medium Enterprises even as young as one year old with short term business finance. Aspiring entrepreneurs need some handholding when it comes to finances. These digital lenders are here to do just that.

Easier on the pocket

Term loans acquired through traditional means dig deep into your pockets. But, those availed of online are far easier for a number of reasons, including.

  • Pre closure penalties go up to 5% of the loan. This isn’t the case if you choose to get short-term business finance from Capital Float. We levy no such charges on clients if they wish to close the loan ahead of the term.
  • The processing fees for a short loan offered by traditional lenders start from 2% and in many cases go up to 3%. Financing through Capital Float means SMEs only have to bear a fee of up to 2% in processing fees.
  • An online lending platform offers small business applicants the flexibility of loan tenure— they can choose from anywhere between 1 month to 12 months. Conventional lenders and most private banks don’t offer term loans for that short a period.
  • Short-term business finance procured from PSUs, private banks and traditional NBFCs carry a hidden charge. SMEs don’t have to worry about that when they approach Capital Float for a short loan.
  • Strict repayment options are one of the characteristics of a term loan procured through traditional means. These work on an EMI-only basis. Would it not be far more convenient to have a choice of flexible repayment? All of Capital Floats’ financial products come with easy repayment options. All loan products are offered at a reasonable interest rate.

Variety of loan products

At Capital Float, we understand that every SME works in an unique environment and has particular working capital needs. Keeping this crucial fact in mind, the company offers innovative and flexible credit products to meet a variety of financial needs. Delivered in an efficient and customer-friendly manner, our short-term business finance is here to help SMEs meet their credit requirement anytime.

SMEs can choose from a host of short loan products that best match their business needs. These include Term Finance, Online Seller Finance, Pay Later Finance, Merchant Cash Advance, Supply Chain Finance and Taxi Finance. Capital Float believes in being transparent in its business transactions and boasts of a wide customer base. B2B service providers, manufacturers, traders, distributors, and aspirational taxi or kirana storeowners are part of Capital Float’s customer base, as its products have helped all these businesses bridge the credit gap comfortably.

There has been a steady growth in the number of small and medium enterprises in the country over the past five years. More interesting, the sector is opening up avenues for tech-driven innovation. However, this flourishing sector still requires substantial monetary support in order to improve its higher global competitiveness over the next five years. Conducive governmental policies along with easy access to finance will greatly enable ease of doing business. In addition, short-term loans for businesses in India, sought through fast, friendly and affordable means, are what will nurture India’s entrepreneurial spirit.

Oct 24, 2018