The 2017 Union Budget underlined the significant role that Small and Medium Enterprises (SMEs) play in the development of the country, in terms of industrial output, exports and generating employment. While SMEs contribute to the growth of the country, they face challenges in raising finances due to their size and their inability to provide adequate collateral.
Many SMEs have operational problems due to improper management and as a result, the lenders are wary about extending SME finance. To cover their risk, they charge higher rates of interest, insist on proper collateral, take extra efforts during due diligence, and even try to appoint their representative on the company board. Given the extra effort required when it comes to SME lending, traditional SME finance companies take a long time to disburse the loans.
Institutional route to SME finance
SME need loans to finance their working capital requirements. SME finance for working capital requirements traditionally starts with the establishment of cash credit, overdraft and working capital limits with the banks. SME finance is also required for purchasing assets and for expanding and scaling the business. For this purpose, term loans are secured from banks and SME finance companies for purchasing assets and for meeting other incidental expenses. Apart from these sources of finance, SMEs can also secure funds from the following traditional sources:
- Export credit to finance the pre-shipment and post-shipment export-related activities.
- Letters of Credit (LCs) and bank guarantees to facilitate trade and meet the performance and financial obligations.
- Bill discounting where bills of exchange which are covered by LCs or bank guarantees are discounted by banks, NBFCs or SME finance companies.
- Leasing where the banks, NBFCs or SME finance companies buy the asset on behalf of the SME and then lease it back to the SME.
- Factoring and securitisation where illiquid assets are used to secure advances from banks, NBFCs or SME finance companies.
- Venture capital investments from individual investors or companies.
Government impetus to SME lending
Recognising the issues faced by small businesses and their criticality to India’s development, the Government has initiated several measures to ease the credit availability for this segment.
- The finance minister has set the lending target for SME finance at Rs 2.44 lakh crore for 2017. In other words the directive ensures that banks and financial institutions will disburse loans to SMEs collectively worth Rs 2.44 lakh crore through this year.
- The Government’s Credit Guarantee Scheme (CGS) under the Ministry of Micro, Small & Medium Enterprises (MSME), which secures the loans given by banks to SMEs, now has an increased outlay of Rs 2 crore from the earlier Rs 1 crore.
- The 2017 Union Budget infused Rs 10,000 crore of capital into state-owned lending institutions to promote SME lending.
- SMEs can continue to avail of loans under the Pradhan Mantri Mudra Yojana, where SME finance is disbursed to small businesses as working capital loans or short-term loans. The amount ranges from Rs 50,000 to Rs 10 Lakh and no collateral is required as they are covered/secured by the CGS scheme.
Alternative SME finance channels
Rapid strides in technology are changing the banking and financial industry and several new channels of credit are emerging as viable alternatives for cash-strapped SMEs.
New age FinTech companies are using advanced technology to introduce new SME lending products that have quick and easy approval processes. Companies like Capital Float have made it easier to secure SME finance. Such new age SME finance companies have introduced online portals and mobile apps that can be used by SMEs to apply for and manage loans. They have simplified and shortened the loan approval process by using big data and analytics to evaluate loan applications.
New age SME finance companies like Capital Float have also introduced innovative financial products for customised SME lending. These new SME lending solutions include:
Collateral-free financing solutions: These are unsecured loans given by the SME finance companies to SMEs who cannot or do not want to provide any security. FinTech SME finance companies like Capital Float use technology to swiftly assess the credit-worthiness of the loan applicants and speed up disbursal so that a business owner can receive the loan amount in their account within 72 hours. Capital Float also has easy and flexible repayment terms which make the loan easier for SMEs to manage.
Merchant cash advances or credit card receivables: These unsecured loans or advances can be availed of by SMEs who use Point-of-Sale (PoS) terminals. The amount advanced is dependent on the monthly credit card sales generated on the point-of-sale machine.
Online seller finance: This is a working capital loan given to e-commerce vendors for managing their day-to-day operations and leveraging business opportunities.
Supply chain finance: In this kind of financing, the SME finance company liquidates the borrower’s invoices by paying up to 80% of the invoice value to the borrower.
Capital Float is one of the leading SME finance companies that uses FinTech to create SME-friendly credit options. It provides short term unsecured loans to SMEs, and a basket of customised financial products that cater to the needs of small entrepreneurs. These include online seller finance, supply chain finance, merchant cash advance, and Pay Later, which is a revolving credit facility.