New-Age MSME Lending Models: POS Financing and Anchor-Led Supply Chain Finance

In December 2022, Mumbai-based VS firm BlinC Invest released its first MSME lending research report. As per this report, the Indian MSME sector has a total credit demand of Rs 69.3 trillion, with a credit gap of Rs 25 trillion. The report highlights a number of business models which can help bridge this credit gap and address MSMEs’ endemic problem of poor access to working capital.

Less than 15% of MSMEs’ credit demand is currently being met through formal sources. The doubling of credit disbursements to MSMEs over the past 2 years is primarily due to increased credit penetration rather than greater risks taken by financial/lending institutions. In fact, approval rates for the medium-risk segment have hovered around 30-35% for private banks for the last year, and have decreased for PSUs and NBFCs over the past 2 years.

“Businesses need funding to grow. The MSME market is largely underserved in terms of financing and solving this huge credit gap is critical to growing the Indian economy as a whole. The market lacked a comprehensive MSME lending report, which not just highlighted the gap but also understood key pain points to propose business models that will solve the problem. We hope the report will encourage investment and innovative ideas that will provide this key sector the much-needed funds to grow their businesses,” said Amit Ratanpal, Founder & MD, BLinC Invest.

Of the nine business models highlighted, the report identifies 4 white spaces: POS financing, anchor-led supply chain finance, NBFC (with branch network), and Embedded Finance. 

POS Financing

POS financing (point-of-sale financing) or Merchant Cash Advance, is a model where companies offer customers financing solutions at the point of sale/purchase. Retailers partner with third-party fintechs in order to integrate their lending services into the checkout process. Customers can avail short-term loans in order to purchase the product and make incremental payments towards the loan.

POS financing is a convenient financing option for customers, especially since the loan requirements are far less stringent than the traditional credit process (in some cases, there is no credit check at all). Additionally, there is often little to no interest on the incremental payments, and customers can avail the loan without leaving the retailer’s website. 

POS financing is a good way to ensure that customers have multiple ways to make purchases, therefore maximizing the chance of a sale and reducing cart abandonment. It gives customers access to low-cost credit options to finance their purchases, and ensures that retailers don’t have to chase customers for payments, as that is the purview of the fintech partner. 

According to the BlinC Invest report, POS terminals have grown enormously over the past few years. POS penetration into the MSME sector currently stands at around 10%, and the number of POS terminals is expected to touch &.5 million by 2025. 

Anchor-Led Supply Chain Finance

MSMEs’ working capital woes were exacerbated by the COVID-19 pandemic; most companies have to pay their suppliers within 7-15 days due to the lack of adequate credit. Most lenders offer term loans which do not address MSMEs’ short-term requirements.

“In India, the supply chain finance gap is estimated to be Rs 60,000 Cr  with current penetration being less than 1% of,” says the BlinC Invest report.

Supply chain financing has huge potential in India. It gives even small MSMEs, tied to an anchor supplier, access to credit for their regular supply requirements via a third-party lender. One of the most popular supply chain finance solutions is reverse factoring, which is an accounts payable solution, as opposed to invoice discounting which is an accounts receivable solution.

Supply chain finance can help MSMEs optimize their working capital cycles as well as avail cash discounts on early payment. The market’s expected CAGR is 17% as per the report.

“Lending to MSMEs is a large opportunity and the segment has a credit gap of Rs 25 Tn. The adoption of technology and roll-out of VAS for MSMEs will be a key enabler for the MSME lending segment in the coming years. The segment has garnered a funding of ~USD 5.5 Bn during the period 2016-2021 and continues to be an attractive area for the investors,” said Mr. Ratanpal.