Festive Cheer & Financial Fear: Liquidity Crunch Hits MSMEs Amid High Demand

In India, the festive season brings unprecedented opportunities for growth but also poses significant financial challenges for micro, small and medium enterprises (MSMEs). As consumer demand surges, small businesses face working capital pressures, cash flow management issues and strained financial resources, threatening to hinder their ability to capitalise on this critical period.

Considered the backbone of the Indian economy, MSMEs play a major role in absorbing the spike in customer activity witnessed during the holiday seasons; however, experts said that managing working capital to keep pace with such a rate of increase can be quite a biting issue. They also lack the inventory or workforce to meet these spikes in demand, which can lead to missed sales opportunities. 

"Access to timely credit can be challenging if the MSMEs don’t have established relationships with financial institutions. In a bid to mitigate potential challenges, MSMEs can put in place cash flow forecasting strategies to anticipate income and expenses during the festive season, which can help them plan better," said Abhiroop Medhekar, Co-founder and Chief Executive Officer (CEO), Velocity, a cash-flow-based financing platform.

Major Pain Points For MSMEs
The biggest pain point is cash flow constraints. Rapid increases in demand can lead to higher sales, but when customers delay payments, MSMEs struggle with cash flow, hindering their ability to restock inventory or fulfill new orders. Experts told BW Businessworld that traditional financing methods may be insufficient or inaccessible, as banks often require collateral or a strong credit history, which many small businesses lack. Balancing inventory levels is tough, as too much stock often leads to excess costs, while too little can result in missed sales opportunities. 

"Credit risk is another significant issue: since there is a rise in demand, many MSMEs issue trade credit to new customers, so they need to check the solvency and bear the failed debts. One more obstacle is connected with securing inventory financing: higher inventory levels are commonly necessary for peak periods. However, many MSMEs would need help to fulfill the stringent requirements upheld by conventional lenders. The absence of credit facilities can stifle expansion when demand is at its peak, thus making it difficult for MSMEs to scale up efficiently during such periods of high demand," said Kunal Jhunjhunwala, Founder, Airpay.

Another major problem for them is payment delays, as bigger clients tend to adhere to very long payment and settlement timelines, which may lead to cash shortages affecting the operations of the business. The backlog of payments to MSMEs has escalated to Rs 21,108 crore, with over 90,000 applications filed, according to data from the MSME Samadhaan portal. This platform, which tracks delayed payments from government entities, identifies state governments as the largest defaulters, with dues amounting to Rs 3,170 crore.

Such lag in payments also makes it difficult for MSMEs to settle their debt with suppliers on time, which may jeopardize the supply of goods due to strained relations. According to a report by the Global Alliance for Mass Entrepreneurship (Game), delayed payments have reached a staggering Rs 10.27 lakh crore.

"While the pain points in these scenarios are primarily to raise funding due to additional gaps created in working capital, these are seasonal and hence most of the financiers do not provide financing options against this temporary surge. Also, once the season is over, there is a risk of delayed payments against the receivables or build-up of excess inventory that could not be deployed during the festive period," stated Navin Saini, Chief Business Officer, SME and MSME Lending, Arka Fincap.

Can Digital Lenders Help?
Fintech platforms and digital lenders offer streamlined application processes, which require minimum documentation and provide quick approvals. Fintechs also leverage technology and available digital data to provide financing options tailored to the specific needs of MSMEs, which can suit their immediate cash flow requirements. Customised financial products like festive loans are also designed to cater specifically to the increased inventory and operational costs associated with the festive season. Repayment plans that align with the cash flow patterns of MSMEs can help them manage repayments more effectively after the festive season, when sales may normalise.

"MSMEs can receive funds in as few hours or days, which is essential during peak festive seasons when immediate liquidity is required. Fintech and NBFCs can customize their solutions based on MSME's credit history and provide short-term loans for the festive days. MSMEs can also use integrated tools for digital accounts, further helping MSMEs for smoother operations and manage their finances more effectively," asserted Arun Poojari, CEO and Co-founder, Cashinvoice.

Fintech platforms, digital lenders, and NBFCs have managed to expand the reach of formal finance, whether through direct lending or by tying up with other financial institutions. The increased reach and penetration have made it possible for MSMEs to access funds in times of peak demand, experts added. 

"These entities have enabled a transforming impact on the lending landscape by streamlining the loan application process, reducing turnaround time from weeks to hours. Moreover, fintech platforms facilitate access to a broader range of financing options, including invoice financing and supply chain financing, which help MSMEs," stated Vinod Parmar, Group Chief Financial Officer (CFO), Vayana.

Inflation, Raw Material Prices And MSMEs
In India, inflation surged in September, thanks to an adverse statistical base effect and a resurgence in food price momentum. For MSMEs, which generally operate with low profit margins, this increase directly impacts their production costs. During the festive season, when demand skyrockets, MSMEs have to procure larger quantities of raw materials, making them even more vulnerable to price hikes.

However, there's a silver lining. Consumption spending is expected to rise by 25 per cent during the festive season, driven by wardrobe updates, electronics, home décor, and jewellery purchases. This increased demand could provide a much-needed boost to MSMEs. 

"With rising costs, MSMEs need to navigate how to adjust pricing without losing customers. If prices increase too much, MSMEs can risk losing sales volume, which is crucial during the festive season when consumer spending typically rises. Inflation leads to higher costs for raw materials, labour, and overhead expenses. If they don’t increase prices, they take a hit on their profitability," Velocity's Medhekar stated.

Experts also mentioned that predicting costs and revenues becomes more challenging with inflation and price volatility. MSMEs may struggle with accurate budgeting, complicating financial planning for the festive season.

"For most of the MSMEs, the challenge lies in being on par with the competitors' prices without necessarily including these costs in the prices charged to customers, as that would cause lower sales, especially when a peak season is anticipated. Furthermore, the unstable price levels of inputs mean that controlling the cost of their products becomes a gamble, which, more often than not, alters the supply chain and increases the cost of holding inventories," Airpay's Jhunjhunwala said.

Also, this unpredictability influences the method of accounting for stocks and, in some cases, may cause a loss if the prices fall after the acquisition of the stock. The lack of clarity regarding the prices of certain materials can also hinder ways of planning and forecasting, which makes it difficult for MSMEs to manage the seasonal demand profitably as they have to do, experts told BW Businessworld.

Minimising Working Capital Pressures
With inflation hovering at 5.8 per cent and raw material prices remaining elevated, several MSMEs are struggling to maintain profitability. However, proactive measures can help mitigate these challenges. Experts noted that government initiatives like the Emergency Credit Line Guarantee Scheme (ECLGS) and the Credit Guarantee Fund Scheme for MSMEs (CGTMSE) can offer support. 

"MSMEs must optimize the cash conversion cycle to ensure timely payments and minimize working capital pressures, especially during periods of high demand. MSMEs can maintain liquidity by accessing revolving credit lines or working capital loans from digital lenders. These lines of credit provide immediate funds to bridge short-term cash flow gaps. Fintech platforms offer dynamic discounting, allowing MSMEs to access early payments from buyers based on a sliding discount rate. This flexibility can optimize cash inflows," said Cashinvoice's Poojari.

Optimising cash conversion cycles is crucial for MSMEs. They need to improve their inventory management systems to reduce holding costs and minimise excess inventory. Industry insiders stated that MSMEs should also regularly analyse turnover rates to identify slow-moving items and adjust purchasing strategies accordingly.

"Implementation of a robust accounting and cash flow management software to track ‘Cash Conversion Cycle’ metrics and identify bottlenecks can help minimise working capital pressures. Clearly defining payment terms and timely payment reminders can speed up collections. Accurate forecasting methods can help align production and sales strategies, ensuring that inventory levels meet customer demand without overstocking," Medhekar mentioned.

Notably, the logistical challenges result in extended shipping times and higher freight costs, making it difficult for MSMEs to maintain adequate stock levels and charge higher from customers, affecting relations. According to a report by the Confederation of Indian Industry (CII), 80 per cent of Indian MSMEs face shipping delays, with an average delay of 22-28 days. This has resulted in 70 per cent of MSMEs struggling to maintain adequate stock levels, impacting their ability to meet festive demand, as per the data by the Federation of Indian Micro, Small and Medium Enterprises.

Higher freight costs have further exacerbated the challenges faced by Indian MSMEs. A report by the Indian Chamber of Commerce (ICC) noted that domestic freight rates have increased by 35 per cent since 2023, while international freight rates have risen by 45 per cent. This increase in costs has made it difficult for MSMEs to maintain profitability, with 75 per cent reporting reduced margins. Consequently, MSMEs are struggling to charge higher prices from customers, affecting their relationships and competitiveness.

According to a report by the Export-Import Bank of India (Exim Bank), MSMEs that adopt digital logistics solutions can reduce transportation costs by 20 to 25 per cent and improve delivery times by 30 to 40 per cent.

Additionally, the average delay in shipping times is around 20–25 days, which is a significant increase from the pre-pandemic era. Also, domestic freight rates have increased by 30 per cent since 2022, while international freight rates have risen by 40 per cent. These disruptions are hindering MSMEs’ ability to meet festive demand, where delays in receiving raw materials or delivering finished goods lead to stock shortages and missed sales.

"To mitigate these risks, MSMEs can diversify their supplier base and establish strong relationships with multiple suppliers to negotiate better terms and faster response times. Implementing robust inventory management systems can enhance forecasting accuracy, enabling businesses to anticipate demand spikes and adjust their stock levels accordingly," Vayana's Parmar added.

Arka Fincap Saini also mentioned that supply chain disruptions can happen and hence the MSMEs should order in time and negotiate hard with their suppliers to get a good deal. They can also order from multiple sources in order to avoid dependency on a single source of supply.

As India's festive season ignites consumer spending, MSMEs face a precarious balancing act. Surging demand and inflationary pressures collide with liquidity crunches and logistical nightmares, testing their resilience. Can MSMEs navigate these challenges to capitalize on growth opportunities, or will financial squeeze dull their festive cheer?