How can MSMEs keep up with the new MSME payment rule?

With an intent to safeguard the interest of MSMEs, the government introduced a new MSME payment rule for the assessment year 2024-2025. As per the mandate, buyers must settle payments for goods procured from MSMEs within 45 days of delivery. 

Furthermore, any pending payments owed to MSMEs must be settled by March 31, 2024. In cases where buyers do not follow the new payment timelines, outstanding payments to MSMEs will be regarded as taxable income.

While the government has intended to protect MSMEs and ensure timely payments, this new regulation has raised concerns in the market and has led to the cancellation of orders to MSMEs.

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What lies ahead: Decoding the 45-day MSME payment rule

The textile supply chain—accustomed to a generous credit period of 120 days—is now grappling with the repercussions of the new 45-day payment window. In Ahmedabad's textile markets, the uptick in order cancellations highlights the challenges faced by businesses navigating this transition. 

Similar issues are also arising among chemical traders. Although the typical credit period in the chemical industry is around 60 days, owing to low market demand, this period is often extended.

Navigating reduced credit periods: Tackling challenges with DPO extension

Considering the rise of order cancellations and uncertainties caused by the new payment regulation, early payments or receivable-backed financing is the ideal structure to ensure timely payments to MSMEs, without any incremental burden on the buyers.

With the technological advancements made in the working capital space, suppliers no longer need to incur delays in receiving payments. A wide range of financing solutions are designed to put an end to cash flow issues and maximise business potential.

Leveraging Days Payables Outstanding (DPO) extension is a strategic approach to mitigate cash flow constraints, honour payment commitments, and ensure MSMEs receive payments within the statutory period.

Unlock financial flexibility with DPO extension

DPO (Days Payable Outstanding) extension enables businesses to effectively balance short-term financial obligations with long-term sustainability objectives. They can strategically extend payment timelines without compromising supplier relationships.

The essence of DPO extension lies in its ability to afford businesses additional time to settle outstanding payments to suppliers while preserving liquidity for essential operational expenses. 

Businesses can partner with financiers to secure timely credit for fulfilling payments to MSMEs, with the option to repay the financier at a later time. This way, businesses can effectively optimise their cash flow management while ensuring adherence to regulatory timelines and sidestepping excessive financial strain.

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MSME 45-day payment rule: CAIT urges Finance Minister to postpone implementation

The role of fintechs in expediting payments

At the forefront of innovation, fintech companies are instrumental in ensuring financial sustainability for businesses and cultivating mutually beneficial partnerships with MSME suppliers—paving the way for a more resilient and inclusive business ecosystem.

Businesses can seamlessly navigate compliance requirements by leveraging innovative solutions of fintech companies. They are facilitating DPO extensions for businesses by implementing tech-enabled solutions designed to automate payment workflows, optimise cash flow forecasting, and enhance transparency throughout the procurement and payment cycle. 

Employing advanced algorithms and digital platforms, these fintech solutions enable businesses to set up customised alerts and notifications for impending payment deadlines.

Backed by real-time tracking and monitoring capabilities, businesses can gain actionable insights into their payment obligations, identify potential liquidity bottlenecks, and proactively mitigate financial risks. This tech-driven approach fosters transparency and accountability across the supply chain ecosystem.

Facilitating timely MSME payments

By making it possible for businesses to extend their payables and, at the same time, accelerate payment to suppliers, the fintech solutions available today bring advantages to both buyers and suppliers, including enhanced liquidity and minimised fluctuations in payment timelines. 

Considering how manufacturers often extend payment terms, ensuring suppliers get paid on time is a huge boon. As a result, payments now can be made to suppliers as early as two days versus 60, 90, or even 120 days, which the buying firm often prefers.

(Ram Kewalramani is the Co-founder and Managing Director of CredAble)