Indian SMEs Share a Greater Positive Outlook

As India approaches a new financial year 2021-22, a C2FO worldwide survey of more than 6,700 leaders of small to mid-sized businesses (SMBsor SMEs) found surprising alignment in terms of access to liquidity, the cost of borrowing and their outlooks for the future.

The 2021 Working Capital Survey was conducted with an objective to measure financial health and outlooks for SMBs in countries around the world. According to the International Monetary Fund (IMF), after a global growth contraction of -3.5 per cent in 2020, the global economy is projected to grow 5.5 per cent in 2021 and 4.2 per cent in 2022.

The IMF has pegged India to be the fastest-growing economy in the world in the upcoming two financial years, with a projected growth of 11.5 per cent in 2021 and 6.8 per cent in 2022. However, the strength of the recovery is projected to vary significantly across different countries, depending on policy action and health care access.

As COVID-19 gripped the world's economy in early 2020, governments launched stimulus programs to aid individuals and businesses affected by the pandemic. While respondents globally echoed uncertainty, there is optimism for SMBs. Despite the challenges of 2020, overall optimism among respondents about their future business prospects was fairly strong - averaging 6.5 on a scale of one to 10. The Indian respondents rated this at 7.5.

This universally positive outlook of successful companies using tenacity and grit to adapt to ever-shifting operating models, evolving consumer demands and supply chain disruptions is evident. While the need for cash has increased in light of the pandemic that demand has been concentrated among limited funding sources, including the new government lending facilities.

In India, the Union budget had shown a strong focus on digital transformation and economic growth after the market recession caused by COVID-19. This is expected to help in terms of business ease and the insolvency mechanism as well as easing requirements for start-up funding. Further, India's mega INR 20 lakh crore stimulus package announced in May 2020 ranked among the most substantial in the world after the financial packages announced by the United States (13 per cent of its GDP) and by Japan (over 21 per cent of its GDP).

Rising borrowing costs illustrate a chasm between the haves and the have-nots in the global marketplace, a certain segment of SMBs do not have access to capital markets like larger corporations do.

Government support played a big role in helping businesses endure the pandemic, as 42 per cent of worldwide survey respondents confirmed they received or had applied for funding from government programs including loans, tax breaks, and money to pay workers. In India, about 50 per cent of the respondents have sought government support, with a majority receiving benefits. These percentages speak to the profound impact of the pandemic and on governments' roles in propping up their economies.

Economic instability and uncertainty about customer orders were seen as the biggest challenges fueled by the economic crisis that followed the COVID-19 pandemic. India ranked second on the list of countries most troubled by economic instability at 61 per cent, behind Turkey (73 per cent). Spain (56 per cent), Australia (54 per cent), and USA (50 per cent) were other countries that figured in the Top 5.

Across 16 countries worldwide, the vast majority of survey respondents said they do not lack options in securing liquidity. They cited a wide range of funding sources, including revolving lines of credit, asset-backed loans, factoring, government support and supply chain finance.

The preferred choices for a business to finance itself included modes like revolving bank line of credit (cash credit/overdraft), supply chain financing, factoring of invoices, cash flow from operations and private funding. While some businesses looked for government support, they also indicated exploring options like asset-backed loans, invoice discounting (loan in which accounts receivables are used as collateral) and peer lending.

An average of 87 per cent of respondents across 16 countries said they have enough liquidity for the next six months. In India, about 92 per cent of the respondents stated having access to all the liquidity (i.e. cash flow) needed to run their business for the next 6 months.

The most significant challenges in 2020 for securing financing for business in the last year for Indian business were in areas of high-interest rates, difficulty in obtaining a loan from traditional banking partners, difficulty in obtaining financing due to decreasing revenue, and inflexible and time-consuming processes to obtain cash from other sources.

When trying a new source of financing, respondents placed importance on considering interest rates, amount of funds made available, flexibility and transparency of terms and speed of approval, while other factors like ease of use/management, financing provider trust and reputation, personal connection with a financing provider and whether the source of funds was secured or unsecured also figured.

Government-backed loans have been and will continue to be critical to the immediate survival of SMBs. However, alternative sources of funding and working capital solutions such as early payment on approved invoices will be the key to businesses' long-term success. As SMBs shift their focus from survival to recovery, optimism for the future typically grows. Just like in previous economic cycles, that optimism should continue, provided the growing demand for liquidity can be met with access to affordable working capital.

To read the white paper report summarizing the global findings of C2FO's 2021 Working Capital Survey, click here.

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