Invoice factoring has great potential to assist SME exporters: Drip Capital co-founder

In an exclusive interview with SME Times, Pushkar Mukewar, Co-Founder and Co-CEO, Drip Capital, said that in response to the unmet needs of SME exporters, several alternate financing solutions have also come up, and one especially has great potential -- invoice factoring.

Excerpts from the interview...

What issues do SMEs usually face in procuring working capital?
Pushkar Mukewar: For many SMEs, the prospect of procuring working capital is complex and difficult. This often stems from a combination of entrenched bureaucracy, uncertainty around policy development, and a lack of easily accessible collateral. SMEs thus find themselves constantly frantically searching for new sources of working capital in a never-ending cycle, attempting to match the demands of running their business.

What are the specific financing requirements of exporters?
Pushkar Mukewar: While most exporters learn to expect working capital issues and prepare for them accordingly, sometimes developments outside their control can further increase uncertainty. Take, for example, the current cycle of rupee depreciation. The general perception is that a depreciating currency translates into good times for exporters because buyers, lured by the attractive exchange rate, end up increasing their import volumes to capitalize on the opportunity. This, in turn, should translate into greater sales volumes and earnings for exporters -- but the reality is often different.

While exporters likely do receive windfalls in the short term from a depreciating currency, in the long-term, these gains are offset by various factors such as the costs incurred by importing raw materials from overseas at higher rates and hedging against future appreciation. Other external factors can also further exacerbate exporters’ working capital problems, such as government intervention. For example, following the government’s implementation of the new GST taxation regime, exporters have faced severe difficulties getting tax refunds, with some sources estimating that as much Rs. 10,000 crore of working capital is stuck in refunds.

In addition to the above-mentioned event-based difficulties, exporters continue to face constant problems such as high-interest rates, demands for collateral, long turnaround times, and excessive paperwork, imposed by conventional lenders and financiers like banks. In such a scenario, where an exporter sees his/her working capital stream under attack from all sides, what’s the solution?

What is invoice factoring? How does it work?
Pushkar Mukewar: In response to the unmet needs of SME exporters, several alternate financing solutions have also come up, and one especially has great potential -- invoice factoring.

At its most basic, invoice factoring is a process of procuring finance by selling the invoices of your transactions to a third party known as the factor. Based on your transaction history and other parameters, the factor gives the seller (the exporter) a credit line which they can then use to finance further transactions to other buyers (importers). In most cases, the seller gets 80% of their invoice value upfront from the factor (often without the need for collateral), and the remaining 20% -- minus the factor’s fees and interest -- after the buyer transfers the value of the invoice to the factor. Also, given that many factoring firms employ third-party credit insurance, exporters also enjoy the benefit of non-recourse financing, i.e. in many cases where the importer refuses to pay the factor, the exporter may not be held responsible for the payment of the pending dues.

Sounds simple, right? It is. By nature, invoice factoring is usually rapid, agile, and easy-to-process. Invoice factoring firms often take as little as 48-72 hours to process loan finance for exporters and offer attractive rates of interest alongside a host of other services.

This kind of process structure has made invoice factoring very popular in many exporter ecosystems in the West, but Indian exporters have been largely unable to procure financing through this route due to a lack of providers. That is, until now.

So what has Drip Capital's journey been like so far?
Pushkar Mukewar: Recognizing the huge gap faced by Indian exporters looking for easier financing solutions to meet their working capital requirements, Pushkar Mukewar and Neil Kothari decided to launch a solution to help level the playing field for Indian SME exporters, and in the process, boost global trade. This led to them co-founding Drip Capital in 2014. After spending nearly two years in research and understanding the unique requirements of the Indian exporter market, Drip Capital launched its product in 2016, offering a financing solution that gives exporters easy access to working capital via a paperless, collateral-free, and quick-turnaround-driven process.

Since its product launch in 2016 (the first pilot invoice was financed in February 2016), California-based Drip Capital has seen rapid adoption by the Indian exporter community. The company has had exponential growth, growing over 20x times in terms of working capital financed in the last two years. Earlier this year, Drip Capital also announced plans for its first international product offering -- in Mexico.

Both co-founders stress that Drip Capital’s assessment of exporters on the basis of trade performance (rather than asset value) is a key factor allowing the company to effectively serve SME customers. They further believe that SMEs should be backed financially as a dearth of working capital is a major challenge in India, and providing collateral-free post-shipment finance to Indian exporters with instant approvals and minimal documentation is their USP.

Along the way, Drip Capital also raised nearly $20 million in funding, with investments from Wing Venture Capital, Accel Partners, Y Combinator, and Sequoia India. The company plans to use the funding to finance its plans to ramp up sales across India and abroad.

What about the future? What's next for Drip Capital?
Pushkar Mukewar: Drip Capital’s future plans include launching new products and services to meet the demands and needs of exporters, including a platform to provide analytics and insights into various export sectors and trade finance.  Additionally, the company plans to leverage technology innovation to productize trade finance by offering solutions customized to solve common issues and pain points faced by exporters. Drip Capital has also partnered with leading trade promotion organization FIEO (Federation of Indian Export Organizations) to organize a series of seminars aimed at educating exporters about the great potential offered by invoice factoring and other trade finance services.

As Indian exports continue to grow (22 of the 30 export sectors monitored by the Indian Ministry of Commerce saw positive growth in October 2018), Drip Capital aims to be a leader in this ecosystem, helping exporters free up as much of their working capital as possible to grow and expand their sales and businesses. By partnering with key policymakers and other stakeholders in the global export-import ecosystem, Drip Capital is poised to become a thought leader and domain expert in the trade finance space for exporters in India -- and eventually the world.