The advent of digitisation and the growth in economy over the years has seen a significant increase in finance requirements by the Micro, Small & Medium Enterprises (MSMEs). The MSMEs need timely finance to meet their day to day business requirements like adding stocks, renovation, promotion, hiring staff etc. Meeting these requirements becomes little difficult via the traditional financing methods like LAP, OD’s etc may already have been utilised or their limits reached. In addition to this, the MSME’s often suffer from having lack of a credit history, low ITR or inadequate of collateral for securing the loan.
The need of the hour, in such moments is to look at non-traditional and alternate financing options, which can help MSME’s meet their credit requirements and expandtheir business. These new age financing optionscan help to reduce the credit gap for MSME’s to a great extent. Some of the most popular new age, non-traditional alternative finance options that prevalent are;
- POS-based loans
This is a very attractive finance option for retail outlets, hotels, restaurants and service providers from the travel, tourism and customer services industry. It works on the concept of advance lending against the average monthly business, conducted using the (point of sale) POS machines the business has. Lenders usually factor in a multiple of the average monthly sales and offer a loan of that amount, to the business to meet its immediate financing needs.
- Customer Lending
For start-ups and businesses working on an innovative product / service model this is the best form of credit that they can get. Customers offer an advance towards the product or service in exchange of preferential rates and delivery to them. Other small businesses too can avail of this facility by discounting their products & services to existing customers in lieu of faster payment against current or past deliveries. This form of lending is based totally on the confidence and relationship the customer has with your organisation and its capabilities.
- Factoring / Bill Discounting
This format of financing has been around for quite a time and is usually seen in industries that are into manufacturing of goods. Finance companies and even banks offer a line of credit to the borrowers against the receivables, after discounting their fees and charges from the same. This option is ideal, when the payment terms for the materials or products are for long durations and the business is in need of an immediate cash flow to continue its production or expand the business.
- Peer to Peer Lending
One of the most popular and fastest growing financing options is Peer to Peer Lending, also known as P2P Lending. It basically refers to direct financing, between a borrower and lender, which is facilitated through peer to peer lending platforms. These platforms help borrowers get funding at the best rates by listing their requirements and details. Potential lenders can check these details and offer a loan if the terms suit them. It is one of the fastest and hassle-free methods of raising capital to meet one’s requirements.
- Crowd Funding
Crowdfunding refers to the method of funding (usually online) wherein small amounts of funds are raised from a large number of people. This form of funding is usually popular for personal & social projects, unexpected high medical expenses and even among start-ups who want to launch their business. Funders are usually given a stake in the business or a share in the profits in case the funding is used by a business or startup. A timeline is usually set for crowdfunding projects to help borrowers plan the usage of the funds as they are collected.
These non-traditional alternative finance options are more flexible and better suited to the growing financial demands of MSMEs. The companies offering these finance options are highly dependent on technology, to ensure proper rationalization of the loans and expanding their reach across all borders. In fact, financial institutions use technology to make the loan repayments easy and flexible, like in case of POS based loans where repayment happens automatically on a daily basis.
For MSME’s looking at expanding and growing their business the right time is now, thanks to the availability of these alternative financing options, which are flexible and can be customized as per the needs and business requirements of MSMEs.