The checkout financing guide to thrive in an economic crisis

Aparna Chandrashekar   /    Content Specialist    /    2022-08-18

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    The micro, small and medium enterprises (MSMEs) landscape has dramatically changed over the last couple of years. Many businesses struggled, others adapted and innovated, and many new businesses were born during the pandemic. Whether they thrived or merely survived, there’s a new challenge lurking around the corner - the high pass-through of the world’s ‘new normal' inflation. 

    India's inflation rate over the last five years. Source: Trading Economics 

    At 15.88% WPI inflation for June 2022, it is the highest  since April 2013 (4.93% in June 2013), the current series. Retail Inflation has stayed above the psychological limit of 6% (7.79% for June 2022) in the calendar year so far. 

    India’s WPI, the quickest rate increase in 17 years, is stroked by the Ukraine crisis and the depreciating rupee which drove up energy and raw materials. As a result, this increases risks for small businesses that can’t pass on the expenses. 

    The MSME distress 

    Large corporations can raise their product prices to maintain profit margins; for MSMEs, who’re unable to pass on the increase in raw materials and operating costs to the end consumer, inflation may affect demand and sales. 

    According to the India SME forum, the operating costs of MSMEs have increased by nearly 24% and the cost of materials has increased by 37% in FY 22. The rising costs impact profit margins, and a sudden increase in cost may affect MSMEs’ customer base. The same survey also revealed that nearly 58% of MSMEs expenditure is spent on raw materials and intermediate goods. 

    MSMEs, despite their significant role in generating employment and setting up the foundation of industrialisation in rural and semi-urban India, are plagued by tighter cash flows, working capital constraints and cyclical demand

    The checkout financing solution

    Put simply, checkout financing is providing the most relevant and convenient payment option at checkout - be it buy now, pay later (BNPL), a credit line, or a loan. Think of it like distributor credit or dealer financing - the lender pays the supplier in advance, and the loan is typically repaid by the small business owner in 15-60 days. The seller - a brand, distributor, aggregator platform, or a digital B2B marketplace usually bears the interest. 

    The only difference? Checkout financing options use an array of data to enable real-time credit in a digital journey. And it goes beyond just payments  - For example, in the case of a returning user, their information is already pre-filled to make for a smoother UX. Messaging too is dynamic, adapting to the shopper’s preferences and online behaviour.

    The merits of checkout financing for MSMEs

    Close to 93% of Indian MSMEs have no access to formal credit. This means they borrow from loan sharks at exorbitant interest rates to fulfil immediate working capital needs. And more often than not, this turns into a perpetual debt cycle that’s hard to get out of, rendering businesses unsustainable. 

    Checkout financing offers flexibility. Small businesses can choose repayment options that suit them. This way they’re not scrambling for liquidity and also avoid high-interest rates and collection harassment that comes with borrowing from an informal lender. 

    Additionally, the underwriting process involved in the checkout financing process ranks cash flow-based metrics higher than balance sheet-based traditional metrics. In the ‘unorganised sector’ in India, largely product-driven, it sits well as it's unlikely for most MSMEs to have balance sheets, structured revenue streams or even formal banking relationships. 

    What’s in it for banks?

    Most banks are wary of lending to new-to-credit customers (which make up a significant chunk of the MSME sector) and often deem them too risky.  By integrating with retails/sellers/B2B platforms to offer checkout financing options, banks can mitigate the risk of lending. How exactly? 

    • Banks can test the waters first. The average credit amount granted under checkout financing tends to be lower at first and can gradually increase as businesses demonstrate good repayment behaviour

    • Since businesses are availing credit to directly buy supplies, it carries a much lower risk than an unrestricted usage of funds that could possibly be spent on non-revenue generating end-use 

    • Powered by alternate data, checkout financing options rely on open banking data and proprietary behavioural data that can better assess creditworthiness, repayment capacities and the probability of default.

    How can FinBox help? 

    Our adaptive journeys are purpose-built for small businesses and our vibrant partner ecosystem of financiers ensures your customers can avail of credit - right when it’s needed

    We bring on board:

    • In-context application process wherein the customer completes the one-time loan application within the application.

    • Payment at checkout, powered by the FinBox software development kit, that allows the customer to avail of various credit options, such as buy-now-pay-later, overdraft facility or credit line.

    • Instant disbursals empower the customer to make the purchase with real-time fund transfer to the platform.

    To deliver:

    • 90% faster time to credit

    • 50% higher average order value

    • Three-times higher approval rates for small businesses

    Conclusion 

    Checkout financing levels the playing field for MSMEs that would have otherwise been outliers in the formal credit system. Easy access to working capital needs and purchase financing allows businesses to shift focus to other aspects of their business, allowing them to grow.  

    As for banks, the risk proposition is undeniable. The large pools of data, which are otherwise left out of traditional bureau scores, not just ensure credit inclusivity, but more business for banks. 

    TL;DR 

    Checkout Financing helps MSMEs with 

    • Credit flexibility 

    • Better chances of approval for credit 

    • Better credit facilities as opposed to the informal sources 

    • Meeting working capital needs quicker 

    • Focusing more on other business needs  

    For banks, the value proposition is 

    • Lower default rates 

    • Better credit assessment 

    • Higher risk mitigation 

    • More business by bringing in new-to-credit (NTC) customers

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