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HomeBlog – Insights by CredAbleBlogCash Flow-Based Lending: Pioneering Financial
Inclusion for MSMEs


CASH FLOW-BASED LENDING: PIONEERING FINANCIAL INCLUSION FOR MSMES

CredAble Team
February 29, 2024
Blog, Business Insights, Featured, homedisplay, Trending
Published on 29 Feb, 2024
AuthorNirav Choksi, CEO & Co-founder, CredAble.


We have witnessed steady digitisation and growth for over a decade now driven by
strong socio-demographic fundamentals. Riding on the back of the digital
acceleration wave, India has seen the momentous rise of the startup ecosystem.

Regardless of the recent advancements, a matter of concern for all of us in the
industry is that while Micro, Small, and Medium enterprises (MSMEs) are a
lucrative and growing market, traditional lending to these businesses continues
to be fraught with challenges. Backed by strong consumer demand and initiatives
promoting ‘ease of doing business’—reports confirm that 9 out of 10 MSMEs are
expecting to make profits this year. On the flipside, the demand for credit is
expected to arise in 60% of businesses across all sectors by 2024.

While secured lending requires borrowers to pledge an asset as collateral,
unsecured lending does not require collateral but may have higher interest rates
and stringent eligibility requirements. These lending options can be challenging
for MSMEs to access due to their eligibility criteria, collateral requirements,
and the need for a strong balance sheet. In this case, borrowing from
traditional financial institutions takes months to complete as it involves the
assessment of the liquidation value of assets, collateral, and other determining
factors. In recent times, cash flow-based lending has come to the forefront as
an ideal solution to meet MSMEs’ growing need for short-term, “sachet loan
credit borrowings".


THE LENDING MARKET IN INDIA HAS TRAVERSED A REMARKABLE JOURNEY

From innovative digital lending models to data-driven risk assessment and
embedded financing solutions—there are several options now available for
businesses seeking credit.

Most businesses at the growth stage require quick access to short-term finance
to meet their daily operational as well as multiple working capital financing
needs.

MSME borrowers are increasingly seeking loans of smaller amounts. Recent reports
reveal that the loan ticket size at public sector and private banks have reduced
by 21% and 7% respectively. That’s not all, over USD 100 Bn of the credit demand
among MSMEs exists for the small ticket loan segment. With an increasing demand
for small-ticket loans of less than 1 million, we can expect to see small-ticket
financing grow at 25% year-on-year.


CASH FLOW-BASED LENDING, A MORE ACCESSIBLE FINANCING MODEL FOR MSMES

LONG-TERM LOANS ARE NOT CONDUCIVE TO MEETING THE SHORT-TERM CAPITAL REQUIREMENTS
OF MSMES—WHO OFTEN PREFER IMMEDIATE FINANCING.

To put things in perspective, the formal credit penetration in the MSME sector
stands at a mere 20%. The credit gap is severe for micro-businesses that
struggle to access traditional forms of credit.

The primary challenge remains that small businesses often have a limited
commercial credit history. Given how most MSMEs are thin-file customers with
sparse bureau footprints, it is challenging for traditional financial
institutions to evaluate their creditworthiness accurately. Besides, traditional
lending methods rely on historical data, which may not provide an accurate
depiction of a business's current or future financial position.

This is where cash flow-based lending comes into the picture. As a reliable
approach to assessing the creditworthiness of small businesses, cash flow-based
lending models address these challenges by offering a more flexible and
inclusive financing solution.

RATHER THAN DEPENDING ON THEIR CREDIT SCORE OR LOCKING AWAY COLLATERAL TO SECURE
FUNDS, MSMES CAN ACCESS FINANCING BASED ON THEIR REAL-TIME CASH FLOW DATA.

Consequently, even with poor credit histories or limited collateral—MSMEs now
have the option to access funds to meet their urgent working capital financing
needs.


UNPACKING THE BENEFITS OF CASH FLOW-BASED LENDING

The MSMEs’ eligibility to leverage cash flow-based lending is determined mainly
by their business’s capacity to generate cash flows.

TO PUT IT SIMPLY—CASH FLOW-BASED LENDING ALLOWS MSMES TO SECURE FINANCING BASED
ON THE REVENUES THAT THEY ARE EXPECTING TO RECEIVE IN THE FUTURE.

By leveraging real-time cash flow data, FinTechs today are redefining the
end-to-end digital lending process for MSMEs. Right from the point of onboarding
and underwriting to credit product configuration and repayment—MSMEs now have
access to affordable and innovative financing solutions.

The real-time visibility of cash flow coupled with a traceable record of digital
transactions of MSMEs, equips lending platforms with data-driven decisioning
models for credit risk assessments. This removes the dependency on using
collateral and credit histories to assess borrowers. In turn, it unlocks access
to timely financing solutions that are of small ticket size, have a short
tenure, and faster approval turnaround time, not to mention flexible repayment
periods.


MOVING AWAY FROM CONVENTIONAL LENDING PRACTICES

New-age FinTech platforms are intertwining data and technology to offer
financial access to MSMEs with improved turnaround times and simpler
documentation based on their cash flow data.

FinTech lenders like CredAble are using cash flow-based assessments to offer
solutions based on transactions between ‘corporates and SMEs’ and ‘SMEs and
SMEs’ to meet the urgent demand for short-term capital and supply chain
financing. Read our latest white paper to understand more about CredAble's
powerful credit underwriting modules and cash flow-centric financing structures.

Explore the SME Whitepaper

We make robust credit assessments by leveraging transaction data through
external databases and ecosystem partners. This way, we are uniquely positioned
to help businesses meet their day-to-day operational needs by providing access
to collateral-free business loans in minutes via a digitised and paperless
process.

Think Working Capital… Think CredAble!



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CredAble is the tradename for Equentia SCF Technologies Private Limited and its
wholly owned subsidiary, Equentia Financial Service Private Limited, a
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 * Enterprise
   * Early Payment Platform
   * Receivables Financing Platform
   * Payments & Reconciliation Platform
   * Trade Platform
   * Pre-Invoice Financing Platform
 * Financial Institutions
   * Digital KYC and Onboarding Platform
   * Embedded Finance Platform
   * Anchor-Led Supply Chain Finance Platform
   * Vendor-Led Supply Chain Finance Platform
   * Receivables Financing Platform
   * Loan Management System
   * Pre-Shipment Financing Platform
   * Deep-Tier Supply Chain Financing Platform
 * SMEs
   * Working Capital Solutions
   * UpScale by CredAble
 * Resources
   * Insights by CredAble
   * Technology
   * Whitepapers
     * Logistics Playbook
     * SME Financing Playbook
 * Company
   * About CredAble
   * Our Team
   * Partner With Us
   * Careers
   * NBFC

Contact Us

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