Cash flow based lending is a transformational concept which encompasses a major shift in bank’s appraisal system from balance sheet-based lending to an objective way of appraising based on cash flows. It allows Banks and NBFCs to lend money to a business based on the present and projected cash flows of the borrower. By definition, this means a company borrows money from expected revenues they anticipate to receive in the future. To underwrite cash flow loans, lenders interpret present and expected future company incomes, its credit rating and its enterprise value.
It will prove to be a boon for MSMEs, Startups and new age ventures who may not have large balance sheets, but hold immense potential of success.
Traditionally, Banks and Financial Institutions in India have lent to companies against their assets. Cash flow based lending is considered to be a more efficient and safe way of mitigating risk as it reduces discretion on the lender’s side and places more importance on the cash flow numbers. The conventional lending is more rooted in the past performance of the companies. The cash flow based lending analyses the borrower’s future, which is more scientific, since the borrower would repay in future. The key benefits of Flow based lending include faster availability of Credit as it would do away with the appraisal of collateral. Documentation is also simple, in the form of invoices issued by the enterprise; sales records; supplier and customer references in addition to an interview of the business owner. RBI recommends Banks to develop tie-ups with Industry Majors in order to enable regular access to transactional information which can be used to develop faster, customised products, best suited for the MSME’s needs.
The different ways of assessing cash flows for a borrower range from turnover ascertained from POS transactions to turnover ascertained via GST data. The paradigm shift would involve development of robust partnerships to ensure seamless flow of information, which would serve as an important pillar of cash flow based lending. Several digital public infrastructure initiatives from the government and regulators such as UPI, Digital Locker, AePS, BBPS, GSTN, TreDs, etc. have established the bedrock for flow based lending.
At LoanTap, we offer personal loan as well as business loan for both salaried and business professionals. We have partnered with some of the large industry players where we fund the MSMEs in their value chain. Thus, with customer’s consent, we are able to get fund flow and transactional data. We have created industry specific algorithms, which help us in providing real time credit solutions to the MSMEs. Some of our major tie ups include one of the biggest online grocery chains, major B2B supplier of consumer items, a leading online wallet company and a major cash and carry chain among others.
“India Needs Low Cost, High Volume Products, Interoperability of Accounts and Flow based Lending to Give a Push to Financial Integration.” (Amitabh Kant – CEO, NITI Aayog)
“The UK Sinha Committee has recommended cash-flow based finance as the best possible way of resolving the working capital issues of the sector.” (Business Line, March 2020)
Cash flow based lending is a revolution that will bring multifold benefits to the MSME segment, which is crucial for our country’s economy.
