MSMEs’ main problem is that they face a cash crunch repeatedly, thus hampering their ability to run their business efficiently and reach their peak potential. India can build globally competitive small scale industries and MSMEs, but government support is essential to achieve this dream. So, to meet the credit demands of the MSMEs, cash flow capital (capital based on cash flow lending) is the new age concept that will help them to get access to working capital to run their business.
So cash flow-based lending is generally disbursed by NBFCs rather than traditional brick-and-mortar banks. Thus, generally, people are unaware or apprehensive about this type of loan. Though there are some reputed organizations in India that offer cash flow-based lending, such as CredFlow.
What does Cash Flow, Lending Means?
So, what does cash flow-based lending means? There are two different methods of lending asset-based lending, which means you can borrow money based on the liquidated value of the assets you hold, mentioned in your balance sheet. On the other hand, cash-flow lending allows you to get access to capital through the future projections of your cash flow.
So, your business is getting access to capital based on the revenues you can generate as per the historical data. Also, credit ratings are crucial in this type of lending for measuring the ability of the business to repay the loan and mitigate the risk.
For instance, if an MSME wants capital for the payroll of its employees, the business can apply for a cash flow-based loan. They can pay the staff and repay later with all the interest on the profits. So, it will help you to get quick access to the working capital that will not hinder the business.
Pros and Cons of Capital via Cash Flow
So, there are both sides to cash flow-based lending. Though for MSMEs are highly advantaged through cash flow-based lending because of the following reasons:
- Don’t Need Physical Assets for Borrowing: So, as an MSME, if you don’t have physical assets to give as collateral to secure a loan, then also your business can get access to capital through cash flow-based lending. It is because, for cash flow-based lending, you don’t require to declare your physical assets. Although, your cash flow should be steady and consistent. Thus, if you are looking forward to optimizing your cash flow, you can try out CredFlow — a SaaS-based platform that will help you optimize your company’s cash flow.
- Reduced processing times: Cash flow-based loans are generally quicker to process. It is because appraisal of collateral is not required. Thus it reduces the process timing, and getting access to the crucial working capital becomes simpler for MSMEs.
Though here are some of the cons of cash flow lending:
- Higher interest rates and Lower Credit Availability: When the economy goes down for the worse of every sector, NBFCs certainly raise their interest rates to mitigate their risk. Along with that, available credit capacity for the MSMEs recedes during economic downturns.
So, optimizing cash flow is the best defense against unexpected financial situations because your capital in hand increases with better cash flow.
At last, cash flow-based lending is best for MSMEs because, without the requirement of collateral, businesses can take loans which helps them to remain afloat. Cash flow-based capital will help fulfill the credit gap of MSMEs. Through cash flow lending and supply chain financing, we can ensure that cash crunch becomes the problem of the past for our MSMEs.