in SMB Finance

There is a radical change that is taking place within India’s border- Our ‘Startup’ market is booming. Over the course of the past half a decade the multitude of MSMEs that have entered into the market has tripled from the previous decade. There is an increasing trend among the entrepreneurs to be diversified and innovative in their approach to grabbing the market.

One indisputable way to assess the growth of a sector in terms of its market share and business generation is to ascertain the degree of funding that the sector was able to absorb.

Based on an industry report by NASSCOM in late 2015, the funding that these SMEs received was estimated at ₹32,558 Crores.

We are talking about a 125% growth as compared to 2014. This puts India as the third largest Startup market in the world surpassed only by the USA and UK.

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In this article we will focus primarily on the P2P marketplace and the role they play in the alternative SME financing space. The ultimate aim for these players is to be able to connect the lender and the borrower with as little deviation as possible from their individual (financial) requirements. The borrower may have a certain criteria for his funding requirements and the same would hold true for the lender as well. What these marketplaces try to provide is the ‘automation in process’ so that the right kind of borrowers and Lenders are connected.

Peer to Peer lending or P2P lending is the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers.

Now in a free market system there is one dynamics of demand and supply that always plays out; where there is demand for a particular commodity or service, the forces of supply will come in to bring about equilibrium. There is a demand for short term funds among SMEs in India but this is not a demand that traditional Banks are willing to meet. Because of this new players have emerged in the P2P lending space in an attempt to bridge their cash flow gaps.

When to Make Use of P2p or Marketplace Funding:

There are many types of alternate funding available which are devoid of the complications that bank funding comes with. But how do you know what source to make use of and when to make use of? It’s pretty simple, but first it’s good to know the various type of funding options that are available out there. When it comes to a start up company the options are Angel Funds, Venture Capitalist, Crowd Funding, Crowd sourcing etc. These are viable options to raise seed funds or starting capital to get your business up and running. It is important to note that all the above mentioned sources of funding are for businesses in their startup phase that require funding on large scale for their fixed assets requirements. In short VCs and Angel investors cater to the needs of startups.

Once you’ve cut across this phase and established yourself as a Small-Medium Enterprise, the next challenge would be in bridging your cash flow deficit. This comes into picture when there is a need for short term cash in the interim between the sale of goods/services and the realization of payments by the customer, which in most cases is 30- 50 days post the actual sale.

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Here we see a demand for short term funding to take care of the cash flow deficit till the payment from customers are realized. Working capital requirements of a business are many including the payment of salaries and day to day operating costs which cannot be delayed until the payments arrive.

This is where these lenders come into picture.  Now while the kind of services that each of these marketplaces provide may be different from each other; they can broadly be segmented as

  • Analysing your eligibility criteria for an unsecured loan based on the company’s credit profile and financials. (Banks however require more substantial information and financials for more than one year including a list of other eligibility criteria)
  • Creating a borrower profile for your company and matching your borrowing needs to the best lenders out there.
  • Providing the loan for around to 70% percentage of the invoice amount usually within a period of 7 days.

What gives P2P lending an edge:

The pivotal point here is that this kind of funding is favourable because of ‘convenience’ ‘ease of access’ ‘size of loan’ and ‘duration of loan’. The plain truth is that Banks do not want to lend to you for 30 days. Here’s why they don’t want to do that.

So in essence the P2P lender are giving your business the cash flow requirements but unlike conventional banks, they are able to disburse the loan

  • without any collateral.
  • by making use of pending invoices to assess loan amounts.
  • faster than conventional banks. You receive the fund in 5-7 days.
  • for shorter durations of time than most banks are comfortable with.

These types of unsecured loans are safer as well; since the borrower can never really borrow more than their capacity to realize cash flows. The loan amount will be a percentage of the total invoice amount or the receivable. for example, if the cash flow a business hopes to realize from pending invoices is ₹1,00,000 (i.e the value of the invoice) ; the loan amount will be around ₹70,000.

This ensures that at no point in time can the borrower actually borrow more than what he is eligible to receive in the future, making bad debts on these loans an unlikely option and making the lending such loans a prospective option.

To sum it up, the P2P lending platform is turning out to be a booming opportunity for lenders, running parallel to the exploding SME and startup sectors. With Prime Minister Modi’s latest initiatives on Make in India and the support for startup and small businesses as well as the provisions in the recent budget to promote SMEs, we are only going to see more growth in these sectors and more players cropping up to meet the increased demands. For now alternative funding is the new black gold for Indian markets.

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