Fintech platforms: Bringing Growth Revolution in Indian MSME Financing

‍Empowering Indian MSME Growth: The Impact of Fintech Platforms

India's economy is thriving, evidenced by a 7.6% surge in GDP in Q2FY24, where the manufacturing sector made a substantial 13.9% contribution. The remarkable role of Micro, Small and Medium Enterprises (MSMEs) in this growth is evident, constituting about 30% of India's GDP and employing over 11 crore individuals. Despite their significance, MSMEs have faced challenges in accessing formal credit. Quite recently, Fintech companies have taken it upon themselves to solve the problems of MSME Financing. 

Fintech platforms are stepping in to play a transformative role in addressing this long-standing issue and facilitating the sector's growth towards India's 5 trillion-dollar economy goal.

‍Fintech Platforms and their influence on MSME Financing

The Indian Fintech ecosystem has witnessed exponential growth over the last 5 years. From just a handful of startups in 2014 to over 2,100 Fintech startups in 2019, the industry is now home to a number of unicorns. One Sector that has largely benefitted from Fintech platforms is the MSME Sector. 

Fintech adoption among Indian MSMEs has reached an inflection point. Driven by digitization and smartphone penetration, MSMEs are readily embracing Fintech solutions for their credit, payment and even Working capital needs.  

The digital processes and data-driven solutions offered by fintech platforms are providing immense benefit to MSMEs in managing their working capital needs and ensuring smooth business operations.‍

How Fintech platforms are enabling MSME Financing and addressing their Working Capital needs?

Right from the onboarding stage, fintechs are using alternative data sources and algorithms to analyze the finances and cash flows of MSMEs.

Based on this digital review, they are able to extend short-term loans for working capital needs at competitive rates and customized repayment terms. Fintechs are also facilitating Supply Chain Financing platforms where MSMEs can get immediate cash against their unpaid invoices from large buyers.

Digital bookkeeping and accounting tools provide MSME owners real-time visibility into their Working Capital needs and help them effectively plan working capital cycles. Payment gateways and digital collection solutions also help shorten receivables cycle and improve cash flows for MSMEs. 

By leveraging technology to assess finances, provide easy access to capital, and enable smooth financial operations, fintech platforms are empowering MSMEs to scale up their business in an efficient manner.

‍Democratizing Access to Credit 

The MSME sector has traditionally struggled with inadequate access to working capital financing options from mainstream banking institutions.

While we talk about MSME Financing, it is important to note that banks have long perceived MSMEs as high risk borrowers due to insufficient financial history, lack of collateral, informal business structures, and high risk of default.

The stringent collateral requirements and extensive paperwork made it difficult for MSMEs to get loans approved. Even when loans were sanctioned, the high interest rates and inflexible repayment terms put additional pressure on the already strained cash flows of MSMEs. Banks generally preferred lending to large corporations rather than MSMEs. 

This systemic neglect from banks left a massive credit gap and crunch in working capital needs for MSMEs to run and expand their ventures smoothly. Due to lack of access to MSME Financing, they had to depend on informal sources like money lenders who charged exorbitant interest rates. The struggles in fulfilling working capital needs inhibited growth and productivity for the MSME sector. 

Realizing the massive working capital needs and credit gap for MSMEs, fintech players are using digital lending models to extend timely MSME Financing .With alternative data based credit assessment, fintechs are able to serve MSME borrowers overlooked by traditional institutions. 

Fintech lenders are using technology innovations like digital underwriting, AI-based credit evaluation models, alternate data and machine learning to derive actionable insights from MSME business data. This is enabling faster, cheaper and more convenient flow of credit even for the most underserved segments like manufacturers, traders and service providers across Tier 2/3 cities.

Top Fintech platforms are leading this charge by building tailored products for MSMEs. Their flexible working capital loans, easy to use platforms and efficient processes are radically transforming traditional lending approaches for MSME Financing.

Based on the credit profile, fintechs extend working capital loans to MSME suppliers and distributors to help them smoothly manage their inventory and production capacities. This ensures stability in the entire supply chain. 

Fintechs are also collaborating with banks to co-lend to MSMEs. Easy digital documentation, faster turnaround times, flexible repayment options, and customized loan products are making fintechs the preferred choice for MSMEs to address their working capital needs, especially in the post-pandemic recovery phase. By leveraging technology and data-driven insights, fintechs are bridging the MSME financing gap.

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Empowering MSME Functions

Increasingly, Fintech platforms are ascending the value chain to evolve into comprehensive MSME financing enablers. Payment and reconciliation solutions are rendering vendor and employee payments cashless, frictionless, and secure. Simultaneously, automated bookkeeping solutions are instilling financial discipline.

Fintech is also exerting influence on broader MSME functions, including inventory management, sales, and procurement, through SaaS-based models. This shift toward end-to-end process digitization significantly enhances MSME productivity and financial health.

Offering Collateral Free Loan

In India, the MSME financing segment contributes to almost 40% of the total exports business, yet it faces significant challenges in financing operations, given the limited formal access to credit. Several fintech companies like Bizongo are bridging this gap by establishing lending platforms that offer small-scale entrepreneurs easy and collateral-free loans, facilitating the scaling of their businesses.

It’s just the beginning of the Fintech-fueled growth revolution in the Indian MSME Financing industry. As companies harness technology innovation across lending models, distribution channels, risk management, and MSME Financing engagement, enormous potential remains untapped.

With newer business models and diverse product categories getting launched regularly, these are undoubtedly exciting times for Indian MSME and Fintech startups! The road ahead is one of symbiotic collaboration using the best of financial and technology infrastructure to help MSME Financing soar.

Wrap your supply chain transformation journey with Bizongo – the key to seamless digitization and unparalleled growth. Now, accessing business financing is just a few clicks away with the Bizongo Next App. Elevate your enterprise, download now from the Play Store.