Alternate financing likely to grow to $60 billion opportunity by 2027, says report

A potential $220 billion worth of credit deficit poses a roadblock to unlocking the economic potential of millions of digitised businesses and, more importantly, the demand for credit is expected to cross $570 billion over the next five years as the number of digital SMEs doubles. 

According to ‘The India Digital SME Credit Report 2023’ prepared jointly by GetVantage, a revenue-based financing start-up, and Redseer Strategy Consultants, of the current $220 billion requirement (as of FY22), around $165 billion is serviceable when adjusted for sick and commercially unviable businesses.  

Even after an infusion of $53 billion in FY22 into the market through various channels, the current working capital deficit stands at $112 billion, as per the report. 

The deficit, as per the study, hinders new-economy and emerging businesses from innovating new products, creating jobs, scaling operations, and building efficiencies. 

While raising capital has always been a challenge for SMEs, the formal lending systems comprising public and private banks have only been able to service 30 per cent of the overall demand, according to the report, which added that the supply gap has opened up vast opportunities for NBFCs and third-party lenders, such as revenue-based financing platforms, trade financiers, etc., to serve the growing market.

Alternate financing solutions like revenue-based financing have emerged as a lifeline for SMEs and will grow to over $60 billion opportunity by 2027, as per the report.

Currently, the share of alternate finance is around five per cent, which Redseer estimates can double to reach around 11 per cent in the next five years owing to alternate-financing platforms like GetVantage taking the lead to drive higher market awareness, a deeper understanding of new-age business models and needs, being tech-enabled, having an SME-first approach, integration of AI-ML to drive real-time decision-making, and high flexibility on repayments. 

The report further added that the lack of collateral and clear documentation has always been a hindrance for traditional lenders such as commercial banks to provide adequate capital to SMEs.  

Alternate finance has emerged as a lifeline for SMEs where innovative lending models such as revenue-based financing, recurring-revenue advances, trade receivable financing, etc. are providing unrivalled access, flexibility and transparency, which are making these quasi-equity solutions ideally suited to help SMEs unlock their true growth potential, stated the report. 

“Small businesses account for 90% of credit demand but continue to struggle to raise capital, owing to poor business metrics, limited assets, and uncertain growth projections. If the current economic and regulatory climate continues, this gap is likely to widen significantly over the next five years,” said Kanishka Mohan, Partner at Redseer. 

In a similar context, Bhavik Vasa, Founder & CEO of GetVantage said that India is a nation of small businesses, and modern businesses in India deserve modern capital solutions that are fair, accessible, and flexible.  

“Alternate financing has a vital role to play in extending the limited reach of traditional lenders to serve millions of new-economy businesses and emerging sectors. The $570 billion credit requirement for digital SMEs in the next five years represents an unprecedented opportunity for alternate financing platforms, NBFCs and traditional financial lenders like banks to collaborate and catalyse economic growth by prioritising compliance, governance, inclusion and innovation,” said Vasa. 

Incidentally, 40 per cent of the overall capital investment into the SME market went to digitised SMEs (12 per cent of the total MSMEs).