Revolutionizing the Future of Cash Flow-Driven Financing and MSME Expansion in India

Micro, small, and medium enterprises (MSMEs) play a huge role in driving an economy’s growth and development. They boost innovation, employment, job creation, and much more. However, many of them still struggle with securing credit. This leads to credit gaps, obstructing the growth and expansion of these MSMEs and the overall economy. 

To handle such credit gaps and other problems coming out of financial inefficiency, MSMEs take financial support via a variety of options. This may include asset-based lending, long-term loans, MSME business loan, invoice financing, or cash-flow-based lending. 

Given the digital era we are already living in and fast moving towards its expansion, the landscape for cash-flow-driven financing looks quite favourable. There are many reasons for this, including transparency, inclusion, and more. 

Cash-flow Driven Financing: Meaning and Benefits

Cash-flow-based financing is a lending approach that has gained huge popularity in recent days. But what is it? Well, let’s understand. Traditional measures of lending use several factors like credit score, collateral, and more to measure a business’s creditworthiness. However, using cash-flow-based lending, businesses may avail of loans by simply using their history of cash-flow. This includes their expenses, revenue, and other relevant financial data. Cash-flow-based lending helps easily and accurately assess the financial wellness of a borrower. Thus, the risk of default payments is also reduced. 

Traditional models of lending rely very much on a company’s history and credit ratings. However, this may lead to ignorance in addressing a business’s current and future outlook. Further, for MSMEs who haven’t been a part of financial services yet, it becomes quite difficult to secure capital via traditional measures. 

However, cash-flow-based financing observes these hurdles and helps MSMEs with a more flexible, easy, and reliable way to analyze creditworthiness. With this approach, you may easily avail capital or MSME loans based on your monthly cash flows instead of your collateral or credit ratings. This means cash flow-based financing is a viable approach for even those MSMEs that struggle with ratings or assets.

How Cash-Flow Lending Helps MSME Grow?

Here is how cash-flow-driven financing can come in handy for MSMEs:

• Easy Credit Access
  As mentioned earlier, MSMEs can easily secure credit using cash-flow-driven financing even without high credit ratings or collateral. You simply need to have a solid history of cash flow showcasing your business’s ability to repay loans. 
• Better Flexibility
  Cash-flow-based lending also helps businesses secure loans with greater flexibility. You may bag loans based on your monthly cash flow, allowing you to avoid the stress coming from extra debt. 
• Quick Loan Approvals
  As mentioned, credit ratings are not given extreme importance in cash-flow-driven financing. Thus, the need for credit analysis, checks, and much more becomes irrelevant. This means your loans are quickly approved and you may get the funds in your account in just a few days instead of months
  . 
• Better Cash Flow Management
  Cash-flow-driven lending allows MSMEs to secure loans based on their immediate short-term needs. Thus, you may easily address your immediate needs allowing you to plan easily without stressing much about the cash flow management coming from long-term planning. 

How Digitalisation is Driving MSME Growth?

The current shift towards digitalisation and the government’s emphasis on MSMEs also showcases the shift in financing options. With the rise and popularity of digital apps, government MSME schemes like CGTMSE or Credit Guarantee Fund Trust for Micro and Small Enterprises, Emergency Credit Line Guarantee Scheme or ECLGS, MSMEs now enjoy better credit accessibility. 

Sectoral Performance and MSME Expansion in India

When it comes to MSME expansion, it is almost impossible not to talk about sectoral performance. For example, government schemes like Atmanirbhar Bharat have contributed significantly to pushing domestic enterprises, with a special focus on a few sectors like manufacturing, electronics, and so on. The aim is to make the country a manufacturing giant. 

The food processing sector is one of the world’s largest, with its output expected to stand somewhere around $535 billion by 2025-26. The share of manufacturing output by MSMEs in all India output was 36.2% in 2021-22 and 36.9% in 2020-2021.

Wrapping Up

All in all, digitalisation, alternative sources of lending, MSME loan, and government schemes are coming together to help MSMEs grow and expand. The new lending measures like cash-flow-based financing also help MSMEs address their short-term capital needs, allow them to better manage their cash flow, and seize the most suitable market opportunities.