By Manoj Chugh, Chairman- Manoj Chugh Advisory LLP
In my series of TechVision videos that are being graciously hosted by Express Computers, I have been asked to suggest ways in which we can help SMBs’ scale up to take on the Goliaths. Whilst this is certainly a BHAG ( Big Hairy Audacious) goal to aspire for and not one for the faint hearted, it is well accepted that this will need fortitude, strength, an ability to apply alternative thinking and access to capital. Capital with Capital “C”, to help bridge the gap, as the firm trudges from one growth milestone to the next.
One big advantage that the larger firms have always had is access to Capital. Tech based Platforms, which have the potential that hitherto did not exist, to bring inaccessible investors into the mainstream to help serve the needs of smaller businesses are providing new hope. Financial Systems have thus far been too busy addressing less than 0.1% of Indians. Hefty ticket sizes and complex products have kept most potential small ticket size investors out of the party. Just setting a context, despite having 13 Crores retail mutual fund accounts in India, less than 1% of them have participated in Alternative Investments.
Innovation is about challenging the status-quo. The good news is that today technology allows us to build a robust, secure, block chain enabled platform that lets small retail investors participate in new investment instruments, offering them an opportunity to diversify their portfolio, whilst offering quality businesses alternate borrowing options. With an investment ticket size starting as low as INR 25,000 and an easy-to-use platform, it is possible to democratize this investment class and expand the universe of investors. In fact the velocity and efficiency, enables a higher return on an annualized basis. Whilst investments are always subject to market risks, they can offer over 12% annualized return, if you make the right choices. Technology offers ways in which the impact of market volatility can be mitigated by enabling investors to diversify their portfolio and help create a passive income stream. However, it is important to do due diligence and act with caution.
Businesses need short term and medium- term capital support. This could be, as an example; for Invoice Discounting or for medium term Revenue based or Asset based financing.
New Age Alternative Investing Platforms like Upcap have brought sophisticated products to the doorstep of many that hitherto had limited access. Ajit Aranha, Roshan Mundhra and Deepak Naragund have done a tremendous job in bringing this Modern Platform to market.
Let us take the close look at Invoice Discounting. As a quick tutorial, invoice discounting is about financing the credit period between the buyer and seller of goods. The seller, having sold his goods to a buyer, instead of waiting for the buyer to pay after a credit term ranging from 7 days to 120 days, gets a percentage of the invoice amount upfront from a financier. The seller pays a fee to the financier for this discounting service. When the invoice payment falls due, the buyer makes the payment to the financier.
Invoice discounting has been in existence for the longest time and you may chuckle and ask, so, what is new? Unfortunately, it’s participation has largely been restricted to Banks and larger financial institutions. Technology platforms like Upcap are now bringing such products to a wider spectrum of retail investors. The latter is an asset class which is attractive since it offers short tenure investment opportunities for the masses. The value proposition is compelling, since it is about receiving funds against an invoice which is verified and validated, where risk can be managed. However, a thorough due diligence of the buyer and seller has to be carried out to ensure credibility of the transactions. That is where the physical and digital Worlds come together. Retail investors can choose to invest then they have a surplus and do not have to commit to regular of monthly investments. Today, technology allows investment in non-traditional instruments as an excellent means for investors to diversify their portfolios, so as spread risk and maximise returns, whilst providing an avenue for SMBs’ to tap these platforms to support their working capital needs.
As an important metric, the SMBs/MSMEs working capital market in India has a funding gap of ~ 315Bn USD. With 10,000 companies being incorporated every month, this gap will only widen. Platform providers work with borrowers from chosen sectors and identify gaps in their working capital, growth capital and capex requirements. These are then turned into bespoke investment opportunities and offered through tech platforms to a wide cross-section of Investors, across income groups, who are keen to participate.
Upcap is disrupting the market to provide an equal opportunity to both businesses (MSMEs/startups looking for working capital management by discounting their bills) and retail investors. Comprehensive credit evaluation models are built, based on AI, that take into account the financial taxonomy of businesses and their growth trajectory to arrive at a financial risk rating that helps set credit limits. This technology platform helps investors make quick and intelligent financing decisions. Blockchain is integrated in the architecture, to retain an audit trail of all activities providing users with an added assurance. Security protocols are built in, to enable safe and secure transactions. A purpose- built credit rating model is used to assess and assign credit scores to both the borrower and the Enterprise (company to whom the borrower is selling the goods to). The model uses Big Data and considers over 30 critical factors from the annual report and audited financials to assess the financial health across solvency, operational excellence, revenue growth, profitability, long term/short term leverage and collection trends. This is then combined with credit reports shared by industry leading agencies and mashed with social media activity of the promoters, to assess risk, thereby helping it assign a unique Credit Score. All users are Onboarded digitally.
Founders of Platforms like Upcap are burning the midnight oil to bring Alternate Investing to the masses and technology is pulling it’s weight to help them get there faster!
For more articles written by Manoj Chugh, please refer to this link:
https://www.expresscomputer.in/tag/manoj-chugh/
