The coronavirus pandemic has created chaos around the world as several countries are now focussing on controlling the spread of the virus while dealing with economic distress. While businesses trying to wake up to the new reality, it can’t be denied that all sectors of the economy have been battered, with the micro, small and medium enterprises (MSMEs) being the worst-hit part of the economy.
The MSME sector in India has played a significant role in the country’s economic growth. This sector has the potential to act as a catalyst for growth and employment generation, which will stabilise the economy during downturns. As per a pre-COVID study, the MSME segment accounts for 33.4% of India’s GDP and around 45% of exports. Also, the segment has generated over 120 million jobs in India till date.
However, the consequent stoppage of economic activities during lockdown has triggered panic across the country, with businesses facing an existential crisis. According to a survey covering 5000 MSMEs, conducted by the All India Manufacturers’ Organisation (AIMO), 71% of the businesses weren’t able to pay salaries in March 2020. If the same situation extends for a longer period, a whopping 43% will have to shut their operations.
Currently, MSMEs are facing regular cash flow issues and are required to take a working capital loan or to open a line of credit. Yet, the difficulty in raising capital or debt from formal sources is the most critical barrier to their growth.
Let’s dive deep and take a look at Razorpay’s role in disrupting the MSME lending segment in India during the COVID-19 pandemic; what is working capital loan and how does it help MSMEs grow; why accessibility of working capital loan is difficult for some MSMEs and the seamless process offered by Razorpay to its users.
Disrupting lending for small and medium businesses
This product is designed to meet the short-term working capital requirements of MSMEs such as salaries, infrastructure overheads, procurement of raw materials and much more.
You can avail collateral-free loans based on your transaction history instead of unrealistic requirements such as a high credit score. The loan can be repaid automatically in specific portions from your settlements unlike loans from conventional sources. Also, you can repay your working capital loan in daily, weekly or monthly instalments as per your business’s convenience.
We have built this non-collateral based financing process to revamp the traditional processes and bridge the MSME credit demand-supply gap. Razorpay has partnered with leading NBFCs to get you the loans at competitive rates.
Now, what is a working capital loan?
A working capital loan is a debt taken to fund a business’s day-to-day operations. These loans are not necessarily used to buy long-term assets but are used to finance short-term operational needs of the borrowers. The needs can include expenses such as rent, payroll, procurement of raw materials and so on.
Now that we are on the same page, let’s see how working capital financing helps in improving your business’s overall growth.
How working capital financing helps MSMEs
MSMEs require adequate working capital to run their day-to-day operations smoothly and efficiently. A lot of working capital is blocked by debtors having longer payment dates despite buying bulk inventory. In small manufacturing businesses, working capital is required at every step of production starting from procurement of raw materials or inventory to disbursement of finished goods. For software and marketing-based small companies, working capital is required to quickly increase the capacity to deliver huge projects seamlessly and continue growing in the competitive market.
However, being the largest contributors to the manufacturing output of the country, MSMEs often struggle with liquidity and are forced to take a working capital loan or open a line of credit.
Challenges in accessing working capital loans
Despite contributing around 31% to the country’s GDP, there is an unmet credit demand from the MSME sector in India. The International Finance Corporation’s (IFC) 2018 Financing India’s MSMEs report estimated that the overall debt demand by Indian MSMEs is Rs 69.3 trillion. However, the formal financing sector caters to only 16% of this overall debt demand, while the rest is financed from informal sources or not at all.
The informal financing sources in India include friends, relatives, moneylenders and chit funds. Some of these sources are way costlier than a bank loan, but the ease of availability attracts small businesses to choose them. They do not realise that the higher cost of debt would drain out their business’s profitability in the long-term.
Here are some reasons why MSMEs are facing difficulty in raising finance from formal sources:
- Inability to prove creditworthiness: Due to the lack of audited financial statements, detailed books of accounts and low or no CIBIL score, a major portion of the MSME sector is deprived of formal sector financing
- Tedious and long-drawn process: The businesses that qualify for a bank loan face a lot of complexities in availing one. Since a business loan sanction needs a large number of data points, it becomes difficult for small businesses to furnish such detailed information to the lenders
- Lack of tailor-made products: Due to the absence of tailor-made products that suit the borrower and lender risk profiles/appetite in the formal financing sector, it becomes challenging for MSMEs to access formal credit
If you too are having difficulty in availing a working capital loan for your MSME, then don’t worry! We are here to help.
Razorpay has understood this problem and found a unique solution to help MSMEs even if they don’t have a high credit score or other unrealistic requirements.
The process of getting a collateral-free loan
If you are already a member of our Razorpay family, you can get the following benefits with Working Capital Loan:
- Get competitive interest rates for your risk profile
- Apply online in 5 minutes with support when you need
- Repay easily from daily settlements with more options
Razorpay’s Alternative Credit Decisioning System (ACDS) will use your past customers’ payments to assign a unique credit score. Based on such a unique score, you will be pre-approved for a loan from our NBFCs and banking partners. Your final approved amount will also be determined on the basis of your real business growth and your ability to pay back without becoming a burden on your business.
As you pay back current loans, ACDS will revise your score and approve you for bigger amounts the next time and even more quickly. ACDS will also help you improve your credit score by reporting timely repayments.
Pre-approved merchants can apply from the ‘Loans’ tab in the dashboard. Once you complete the online application from the dashboard, you will get a personalised loan offer in less than 3 working days followed by a quick loan disbursal.