Is Your Business Ready for the New MSME 45 days Payment Rule?

The landscape of supplier payments in India has undergone a significant shift with the introduction of the MSME 45 days payment rule. Here’s what you need to know.

What is Section 43 B (h) of the Income Tax Act?

Starting 1st April 2024, Govt. of India has mandated the implementation of Section 43 B (h) of the Income Tax Act. This act has been introduced as an amendment to the existing Finance Act 2023, by adding clause (h) to Section 43B.

To boost the growth of MSMEs, this MSME 45 days payment rule specifies that if any payments due to MSMEs remain unsettled beyond 45 days, they will not be eligible for tax deductions until the payment is settled. This means that buyers need to make payments to MSMEs within a maximum of 45 days (if the credit period is defined) or 15 days (if not defined). The goal is to encourage large enterprises to prioritize settling payments with their MSME partners, thus fostering a stronger economic environment for MSMEs. 

Challenges and Considerations for Businesses

Some industries have always been operational in a cash-and-carry model where this act will not have much impact, however, industries such as textiles, electronics, etc. that usually enjoy longer credit periods will be hugely impacted by the MSME 45 days payment rule. For instance, the Clothing Manufacturers Association of India (CMAI), anticipates that MSME apparel will face quarterly losses of INR 5,000-7,000 Cr. Apparel retailers typically work with a 90-120-day payment cycle, and it can go as high as 180 days as well. All businesses buying from micro or small enterprises that are UDYAM registered will come under the purview of this amendment.

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Who Does the MSME 45 days payment rule Impact?

Let’s break down the personas of companies that will get hugely impacted:

1. Large enterprises buying from MSMEs

• Stressed Working Capital

This MSME 45 days payment rule has been implemented considering MSMEs in particular. However, medium and large enterprises will still have to adhere to traditional payment cycles of 90-120 days for their receivables, and payables need to be settled within a maximum of 45 days. This is going to create a huge stress on working capital for enterprises, if not properly planned for.

• Increased taxes

If any of the outstanding amount is not been paid by the enterprise, it gets added to the taxable income right away, which would mean a higher tax liability.

• Reduced profits

The impact on profits is not just limited to the increased tax burden, however, there is a penal interest component set for such delayed payments to MSMEs. This interest would be 3X the bank rate notified by the RBI. For any business, paying 3X penal interest on their COGS will always pose a huge threat to their financial strength.

2. MSMEs selling to Large Enterprises

• Reduced margins

With a lowered payment cycle, large enterprises would expect discounted prices on the goods being sold.

• Reduced business growth

Given the stress on the working capital of large enterprises, there will always be an intent to change the supplier to a non-MSME business, thereby impacting the business growth of MSMEs. 

• Increased returns

A few enterprises chose to return the goods during the last fiscal close, as they were unable to make payments within the 45 days payment window. Though this might be a diminishing issue, this MSME 45 days payment rule will create huge business and supply chain concerns for the MSMEs.

3. MSMEs buying from MSMEs

Though the broader elements of challenges stay the same in the case of MSMEs buying from MSMEs, however, these MSMEs can get adversely impacted because of this 45 days MSME payment rule as they usually don’t have deep pockets compared to a large enterprise. For instance, an MSME business having a net profit of 10 lakhs and 50 lakhs in MSME overdue amounts, can potentially have an additional 17 lakhs to pay in cashflow damage due to this amendment. So the critical question for such businesses will directly point towards their survival in the long run.

The MSME 45 days payment rule has come into effect from 1st April 2024, however, the majority of the businesses are still figuring out ways to mitigate challenges that will come out of it. 

If you’re also looking for ways to mitigate these challenges, fill out this form below and Bizongo’s credit advisors will help you solve your financial needs.

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How to Prepare for the MSME 45 days payment rule?

Implementing new payment rules is not usually easy for any business or any industry, given they are used to operating in a certain way for many years. If you are a traditional player, be ready to face issues coming from resource constraints, technological limitations, limited or lack of awareness, and most importantly the resistance to change.

The majority of the challenges can be best solved with more preparedness as we start the new fiscal year. Businesses need to have access to better finance options to not just solve these challenges, but also to be more in command of their working capital requirements. Here are a few financing options that can be easily explored:

1. Supply Chain Finance

If you are a large enterprise buying from MSMEs, there is a readily available solution in the form of Purchase Invoice Discounting (PID). It is a short-term finance in which banks/NBFCs/digital fintech platforms can discount the purchase invoices and pay the MSMEs within the stipulated timelines, and you can still enjoy the longer payment cycle as earlier.

However, if you are an MSME supplying to large enterprises, you can opt for Sales Invoice Discounting (SID), where all the sales invoices can be discounted by banks/NBFCs/digital fintech platforms. This is usually quick to get, with digital onboarding, and is usually off-the-book financing and does not impact the balance sheet of the business. 

Read More: How Supply Chain Financing Can Give You A Winning Edge

‍Next by Bizongo offers access to a network of financial institutions, providing a variety of financing options for supply chain financing programs. This can help you manage cash flow constraints and meet your payment obligations.

2. Factoring

It is also an additional short-term finance product, in which you can sell your receivables to any factoring entity which is usually an NBFC or a bank. This factoring entity usually pays up to 80-90% of the invoice value upfront. This facility can be a lot relevant for MSMEs that usually have huge outstanding invoices from large enterprises. This is usually more costly, as compared to invoice discounting, as the factoring entity also owns up the collection from buyers.

3. Anchor-led Vendor Financing

Large enterprises can become anchors for their MSME vendors who might not be able to get access to supply chain finance given their business volumes, creditworthiness, or other qualification issues. In such a facility, MSME suppliers become the spokes (borrowers), and their onboarding is usually very quick given lenders have faith in the strong books of the anchor (large enterprise in this case).

4. Unsecured Business Loans

This is the quickest form of financing available right now to businesses where you can get the sanction within a few hours and disbursals in 2-3 days only. These are collateral-free loans without any end-use restrictions. These can solve immediate problems coming from working capital issues, delayed payments, or any other CapEx requirements that you may have.

Next by Bizongo streamlines MSME financing by incorporating multiple financing options including business loans, machinery loans, loans against property, and structured loans through partner banks and NBFCs. Now you can conveniently explore and secure funding without tedious loan application procedures and long waiting periods.

5. Overdrafts

Overdraft is best in cases where there are uncertain cash needs. Especially, for businesses that don't have a supply chain finance product available, overdraft becomes the ideal solution to settle for any overdue MSME payments within the stipulated time. 

Conclusion: A Win-Win for the Business Ecosystem

The MSME 45 days payment rule requires adaptation, but it ultimately leads to a more robust business ecosystem. By embracing this change and implementing strategic solutions, your company can ensure compliant and timely payments, fostering stronger relationships with your MSME partners. Investing in tools like supply chain financing and digital payment platforms further streamlines the process, promoting efficiency and potentially generating cost savings.  The MSME 45 days payment rule is not just a regulatory change, but an opportunity to build a more collaborative and sustainable supply chain for future growth.

Ready to harness the power of embedded financing for your business? Explore how Next by Bizongo's integrated solutions can transform your supply chain and keep your operations running smoothly. Contact us today to embark on a journey to financial stability and success.