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SEMINARY - Special Supplement, Oct-Dec'2011

Funding for SMEs – What are the Options?

Pankaj Priyadarshi, Principal Consultant, Sumedha Adisors
Nov 2011

In any economy, Small and Medium Enterprises plays very big and important role in creating employment, building resilience in the economy to counter macroeconomic events, producing goods and services, and serving much larger population. Their roles become more important in case of countries like India which are economies in transition from low income countries to middle income ones.

However, when it comes to financing their businesses, most of the SMEs face roadblock. The financial world is lopsided against the SMEs. It is easier for big businesses to get loan from banks and funding from public; it is easier for employees to get loan from banks; but it is extremely difficult for SMEs to get loan from banks. Even when other forms and institutions for funding are available, SMEs do not have information and hence they lose out.

The dire need for funding

It will not be an exaggeration to say, Indian SMEs are in dire need for funding. The situation is extremely grim. Look at the contribution of SMEs in the GDP of countries like USA and UK. They contribute 40%-60% of the GDP and provide employment to 50%+ of the workforce. Even in developing countries like China and Vietnam, the ratios are very similar. However, in case of India, the contribution to GDP is just 20%. This shows huge untapped potential for SMEs. The major cause is lack of financing for SMEs.

Innovative funding approach for SMEs

The lack of financing is not only because of lack of interest of banking institutions but also because of ignorance among SMEs on the financing available.

World institutions –

There is strong emphasis on sustainable development by the development institutions around the world. These can be a good source of funding. For example, Asian Development Bank has been funding SMEs in Srilanka, China, ASEAN, and many other countries. Funding gets much easier when they are for the sustainable and environment friendly projects.

The funding could be in the form of credit facility through the commercial banks in these countries. In June, 2011, Madhya Pradesh Government signed a credit facility deal with the ADB for $300 million.

World Bank is also playing its part in reducing the financial constraints that SMEs face in India. It regularly provides loan to Government institutions or the SMEs organizations directly.

Government schemes –

This is the most viable ways to finance your business. The assistance comes in the following ways.

Capital Subsidy
Tax exemption
Tax Deferral
Other help such as free services (for example, centre has agreed to help companies file patents. The services will be given free of cost)

For example, Credit Linked Capital Subsidy Scheme (CLCSS) by Government of India helps SMEs in technology upgrade in selected sectors. This can benefit SMEs immensely. It will make them more efficient at much lesser cost.

This could be of great help to SMEs. The usual fear about Government notwithstanding, SMEs should try to get these loans. Most of the SMEs assume that they will not get it and never even try.

National institutions –

The national institutions play the major part in finding the businesses of small and medium enterprises all over the world. However, this is yet not strong in India. Public sector banks (PSBs) in India have goals to meet for the funding of SMEs and hence there are efforts from PSBs to meet the target.

There are other institutions such as SIDBI, formed to promote and assist SMEs in raising requisite funds for operation, administration, and business expansion. SIDBI has set up two funds to help SMEs.

A corpus of 100-500 crore for growth industry such as biotechnology.
A corpus of 10,000 crore for giving interest rate subsidy and capital infusion for all types of SME sectors.

These funds can provide much needed financing to SMEs. Similarly National Small Industries Corporation (NSIC) is in discussion with SBI to provide easy and cheaper credit to SMEs. They already have such pacts with Central Bank, Axis Bank, and Yes Bank. These institutions are doing their part in making required funding available to SMEs.

Local and Regional Institution –

There are states which are more pro-active in helping SMEs in various ways such as funding, helping in filing patents, building intellectual property, getting them rated for better prospect, raising funds from various other sources, and many more.

For example, Maharashtra has Industrial Promotion Subsidy under which the state provides capital subsidy. The quantum of capital subsidy is linked to fixed capital investment. SMEs investing in capital expenses can claim the subsidy in tax.

Conclusion

Finally, there are many consulting companies that have come up in recent years specifically focused on SMEs. They provide consulting services to them by advising the cheapest way to raise funds, liaising with Government to avail the schemes, and consult on overall operational and technical issues to improve efficiency, reduce bottlenecks, and optimize costs.

It is good idea to speak with such consulting companies for advice. Though SMEs may not need help in many cases if they have right people to interact with financial institutions. However, in case of any uncertainty, the right way is to avail the services of these consulting firms.

The Author can be reached at pankaj@sumedhaadvisors.com

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