A Solution SMEs Cash Flow Challenges

As a distributor of consumer goods running an enterprise for a decade or more you may be faced with challenges in managing cash flows. Vendors demanding immediate and timely payments, and retailers looking for 30-90 day credit terms are an everyday scenario for you.? You may have tried several options such as negotiating longer credit periods from vendors or offering cash discounts to retailers to improve your cash flow situation, but none of them worked for you.

One potential solution to this problem is subvention. Subvention refers to a situation where a third party provides financing assistance to a retailer and the distributor takes on the burden of the interest rates helping retailers access financing at a lower cost while meeting their short-term financing needs.

Take the example of Mr. Dheeraj Gupta a consumer goods distributor in North Delhi who utilised subvention to solve his cash flow woes and expand his business. Dheeraj was providing goods worth Rs. 25,000 to his retailers. Most retailers would opt for a 60-90 day credit period, which meant a lengthy cash conversion cycle and cash flow constraint for him. The lure of a 2% cash discount for early payments was good, however, the retailers were unable to arrange cash to pay upfront and avail of its benefits.

Mr. Gupta decided to utilise JiT Finco’s Inventory Finance program for retailers where he subvented the interest of 1.5% per month and offered his retailers an additional cash discount of 0.5% per month for upfront payments for his goods. The response from his retailers was overwhelming, and he saw a significant increase in early payments.?

With the flexibility and convenience the program offered, Mr. Gupta could better manage his cash flow. The timely line of credit allowed him to focus the efforts of the sales team on expanding the business rather than on collecting money.

Closing Thoughts

Subvention can be a perfect solution to SMEs cash flow challenges and short-term financing needs. It's a mutually beneficial arrangement that helps Retailers access financing at a lower cost, Distributors receive upfront payments, build better relationships with retailers, and increase customer loyalty. The Financers can attract more business too from distributors looking to improve their cash flow.