Akshat Birla, Founder & CEO, Finovate Capital

Akshat is the Founder and CEO of Finovate Capital. He has over 16 years of industry experience spanning across Supply Chain (i2, India), Banking (Credit Suisse), Startups (MBA&Co) and Technology (Samsung). During his stint at Samsung Pay he spearheaded the launch of Samsung Pay in South East Asia and in India, where he launched the service to over 20 million consumers and played an instrumental role in building the brand and establishing it as one of key players in the mobile payments space.

 

Working Capital has always been the silent cancer behind most issues related to cash flow that an organization faces, and this is even more accentuated for New Economy players who have an equity funding cushion that prevent them from seeing these issues. A lot of times this is not even apparent until it’s too late. As per a study by EY, India Inc currently has over Rs 5.2L crore tied up in working capital and for the period of 12 months ending 30-Sep-2020, the pandemic has stretched cash to cash cycles of top 500 listed companies by 16% (or 6 days year-on-year), with sectors such as Power, EPC and Oil & Gas hit the hardest, 69% of which in turn extended their payables to offset this delay and preserve cash. Similar scorecard for smaller companies was much more grim.

Historically, the gap in payment cycles existed mainly because of the inefficiencies and the manual nature of trade, receiving delivery confirmations, physical challans and invoices, quality check and communication, but gone are the days of such inefficiencies. Yet, the payment cycles remain stretched as organizations have found this to be a very easy lever to manage their own cash flow and working capital, without realizing how expensive this financing is (given the supplier is going to load the cost of financing, which is a lot larger than the corporate’s own cost of financing, into the pricing of the goods supplied). Some have used it to their advantage to create negative working capital balance sheets e.g. FMCG and some have inherently been hurt by the long sales cycles, e.g. Real Estate.

So what can these New Economy companies and SMBs do to ensure they do not get trapped in this vicious working capital cycle?

Firstly, ensure you understand the deeper repercussions of your own supply chain and make sure that you optimize the payables and receivables, but not over optimize as then the benefits start costing you dearly, e.g. if a supplier is not paid on time, he may struggle to meet the supply requirements and delay the project/consignment which will in turn delay customer servicing and payments. Secondly, use formal unsecured working capital financing options that ensure that your specific working capital needs are being catered to.

There are a lot of new age tools now available that leverage the principles of “affinity” to corporates to provide unsecured and truly transaction led financing as opposed to only balance sheet led lines.

BNPL: Or Buy Now and Pay Later, is now no longer a fancy consumer finance tool, but is fast gaining popularity in the B2B marketplace as well. An SMB gets access to credit limits, based on transaction history and past payment behaviour and various other transactional parameters and can choose to pay 30/60/90 days to match the payables with the sales receipts.

RBF: Revenue based Financing is a newer entrant in the space. The aim is to help SMB convert large business expenses (Insurance, Logistics, spares, capex investments – vehicles etc.) into small payments/EMIs that are deducted from future revenues and more the predictability of revenue, the better the terms of the product.

For startups with revenue, RBF can be a good option to raise capital without diluting equity, even though the startup may not be profitable.

Dynamic Discounting: Surplus cash on corporate balance sheets can be utilized to run early payments programs to the vendors at a nominal cash discount. This provides seamless access to working capital to the vendors while giving excess returns to the corporates (as compared to liquid treasury fund/FD returns).

Embedded Credit Line: Credit Lines can be enabled at the point of transactions that allow SMB buyers to experience seamless checkout while getting short term credit to enable larger and more frequent purchases and drive loyalty to the brand/marketplace

Securitization of Assets: Securitization, although still in its nascent stage, allows SMBs to convert large Capex spends into operational expense by securitizing the assets into an SPV and offering smaller units as pass through certificates or PTC enabling retail participation in a new asset class.

It can be complex and administratively taxing for corporations to strategically structure such deals, liaison with multiple banks, perform complex AP/AR reconciliations and get a single view across all financing programs enabled at multiple tier to aid decision making or push sales. That’s where a strong fintech partnership or leveraging “Fintech as a Service” can be very beneficial to not only corporates, but also the SMB ecosystem partners.

Fintech as a service has already helped a lot of corporations solve real life problems and that too with very little to almost no effort and cost at their end. As an e.g. Finovate has helped the suppliers of a Logistics Company get access to working capital despite having almost no to very thin credit history, including single truck drivers and operators. Another such platform is a pharma distribution platform supplying to Pharmacists, that has enabled a BNPL option for its massive network of pharmacies to procure the medical supplies on credit and at the same time benefit from the cash discounts offered by the distributors, making this a win-win for all. Another such example where Finovate has been able to embed Financing is a automobile parts supplier that has created a Credit Wallet, based on transaction history, for workshops to seamlessly procure from, while giving them 30-45 days to make payments.

The future for finance and especially working capital finance is going to be embedded (at the point of the transaction) as opposed to being an afterthought. The organizations (traditional corporates and new age B2B platforms) that adapt and move fast to enable this for their ecosystem will stand to gain the most in terms of efficiencies and cost arbitrage and win in the long term. A handful of Fintechs, including Finovate Capital, have already emerged to optimize this across corporates and lenders and give the corporate/platform partners almost plug and play systems to enable financing of their ecosystem (Suppliers, Vendors, Distributors, Dealers and Retailers), but this is just the start of a mega shift in the approach to financing as we know it today.

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