How Working Capital Solutions Such As Invoice Discounting Help MSMEs Become More Compliant

Creates an ecosystem of compliant suppliers with improved filing behavior and enterprises with improved ITC claims

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A survey conducted by Clear on 500-plus supplier companies has revealed that enrolling for Invoice Discounting has had a multiplier effect on their compliance. These supplier companies were listed on Clear's platform.

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As part of the survey, Clear spoke with promoters and business owners of these companies to understand how invoice discounting has impacted their GST compliance. Further, Clear analyzed GST filing statistics for these companies i.e. how did these companies fare with respect to on-time GST return filing; in the 6 months time period preceding and following their enrollment for early payment service.

Survey findings on improved compliance

Clear's analysis revealed that filing and payment behavior improved for these 500-plus supplier companies for both GSTR-1 and GSTR-3B. GSTR-1 filing performance improved by 15-20 per cent on average, while GSTR-3B improved by 10-15 per cent. For 50 of these supplier companies, compliance across GSTR-1, GSTR-3B improved in the range of 50-100 per cent. What this means is that suppliers are filing and paying GST faster and at a higher frequency than they were before enrolling to any working capital solution. The availability of credit allows them better flexibility to manage their payouts.

On the flip side, timely GSTR filing by supplier companies also benefits enterprises who transact with these supplier companies. This is because improved supplier compliance ensures smooth ITC flow, reduced effort in vendor liasoning and fewer reconciliations for enterprise GST returns, allowing enterprises to maximize ITC claim and manage tax payments with more certainty. Some of the enterprises also review compliance behavior and leverage it to incentivise suppliers to avail more credit facilities.

Notably, a significant percentage of these supplier companies (over 65 per cent) are not covered under the e-invoicing rules. This implies that the compliance didn't improve because of auto-population of GSTR-1 from e-invoicing rather because of credit from invoice discounting solution. .

Improved payment cycles

For these supplier companies, the average number of days to receive payment was reduced significantly to anywhere between 15 to 40 days. Note that this analysis was done for supplier companies who are availing credit via Invoice Discounting on roughly only 15-20 per cent of their receivables. It is easy to see how improvement in compliance will rise more as credit penetration deepens as these supplier companies avail credit on their remaining receivables.

One of the major MSME suppliers on Clear Invoice discounting, Savia Felt's owner Milan revealed, "After using the Clear ID program for receiving early payments, our cash liquidity has improved which also helps us to file GST returns on time and improve our compliance processes with our clients."

What it means for Enterprises and their suppliers

Given the strong correlation, it is imperative for Enterprises to consider comprehensive vendor automation solutions that help them alleviate inefficiencies in supply chain in AP automation, compliance and B2b credit/payments all in one platform because solving all these problems together is the only way to really unlock value in their supply chain digitisation journey.

The suppliers on the other hand should constantly look out for opportunities with their customer enterprises extending such solutions because it can meaningfully help improve their business process while providing cash flow liquidity to grow their businesses.