Credit options for MSMEs in the manufacturing and infrastructure sectors
News24 Jun 2024
Micro, small, and medium enterprises (MSMEs) are vital to the economic growth of a nation. However, accessing working capital through traditional channels such as banks and NBFCs can take time and effort. Instead, MSMEs can leverage their supply chain partners, such as JSW One, to explore off-balance sheet trade arrangements. These arrangements include unsecured lines of credit extended from the anchor's balance sheet, Letters of Credit (LC), and Bank Guarantee (BG) instruments. These options allow MSMEs to easily access growth capital, maintain healthy cash flows, and build strong supply trade relationships. Such trade arrangements are exclusively available to MSMEs as part of a supply chain, like those with an OEM or an e-commerce platform like ours.
Traditional credit options
- Bank loans: traditional bank loans are a primary source of credit for MSMEs. These can be short-term or long-term, depending on business needs. However, collateral requirements and lengthy approval processes often pose challenges.
- Overdraft facilities: banks offer overdraft facilities that allow MSMEs to withdraw more money than is available in their account up to a specific limit. This provides flexibility in managing day-to-day operations and cash flow fluctuations.
- Microfinance: microfinance institutions provide small loans to MSMEs that may not qualify for traditional bank loans. These institutions focus on offering credit to underserved and rural areas, supporting small business growth.
- Government schemes: various government schemes and initiatives are designed to support MSMEs. For example, the credit guarantee fund trust for micro and small enterprises (CGTMSE) provides collateral-free credit to MSMEs, reducing the risk for lenders.
Off-balance sheet credit instruments
Off-balance sheet credit instruments provide an alternative financing method that does not appear on the company's balance sheet. These instruments can help MSMEs manage their cash flows more effectively and support their growth. Key off-balance sheet credit options include:
- Trade Accounts Receivable (Trade AR): supply based transactional credit limit extended to customer for a period ranging from 30-45 days. This allows users to manage their peak demand purchase cycles from anchor partners without disruptions. These lines utilised shall remain as account payables rather than loans.
- Letters of credit (LC): letters of credit are widely used in international trade to guarantee supplier payments. An LC assures the seller that the buyer’s bank will honour the payment upon fulfilling the terms and conditions. This reduces the risk for suppliers and enables MSMEs to negotiate better credit terms with vendors.
- Factoring: it's an instrument anchor orchestrates to advance trade receivables, partnering with banks to discount the invoices while extending the credit terms of 45, 60 and 90 days for MSMEs to pay back. This allows healthy cash flow in the supply chain, benefiting both MSMEs and anchors. This off-balance sheet arrangement can help MSMEs have a better account payable terms and trade relations.
Leveraging off-balance sheet instruments for growth
MSMEs can significantly benefit from leveraging off-balance sheet credit instruments. Here’s how:
- Improved cash flow: with an extended line of credit or credit period, MSMEs can manage the cashflows mapped to their receivable cycles by impacting their working capital needs.
- Reduced risk: off-balance sheet instruments like LCs and factoring transfer the risk of non-payment from the MSME to the third party, reducing the financial burden on the business.
- Enhanced creditworthiness: utilising these instruments can improve the creditworthiness of MSMEs, making them more attractive to traditional lenders and investors.
- Flexibility and growth: with improved cash flow and reduced risk, MSMEs can invest in new opportunities, expand their operations, and drive revenue growth.
Our Trade AR, LC, and factoring products
At JSW One MSME, we understand the financial challenges MSMEs face in manufacturing, building, and infrastructure. Our Trade AR, LC, and factoring products are designed to provide you with the financial flexibility and support you need to thrive in a competitive market.
- Trade AR: unlock the value of your receivables and get immediate access to working capital with our Trade AR solutions.
- Letters of credit (LC): ensure smooth international transactions and reduce payment risks with our reliable LC services.
- Factoring: improve your cash flow and focus on growing your business with our efficient factoring solutions.
Are you ready to grow your MSME? Register with us today to discover how our credit solutions can help your manufacturing and construction business.