The “Do More With Your Time” interns have been enjoying their lockdown days working on interesting tasks & assignments. Here’s a blog by our 15-year-old intern, Devashree Gupta on the funding options available for SMEs.
Small and medium enterprises are one of the most underestimated assets to a national economy. They create numerous job opportunities, offer innovation, and produce various goods and services. Additionally, it accounts for 45% of the country’s total manufacturing output and 40% of India’s exports. Yet, many times it is difficult for SMEs to find a suitable source of finance. This is mainly because commercial banks avoid giving them loans due to their lack of collateral, significantly smaller assets, and a lack of historical data. This hinders their growth potential and stops them from enjoying many benefits of much larger enterprises. However, there are many companies in our nation that provide numerous financial products to support SMEs and help them reach their growth potential.
Start-ups And The Financial Products
One of the most recent ways of funding an SME includes crowdfunding. Essentially, a crowdfunding platform connects three parties: the entrepreneur, the contributor, the moderating organisation. As we have dived into the world of e-commerce, crowdfunding has become a convenient and quicker way of gaining capital. It allows SMEs to give a detailed description of their product and people who like the concept and idea can contribute a small amount of money to it. This brings together a large group of people who each contribute a little amount and thus the enterprise can generate enough capital. There are various crowdfunding platforms all over the Internet. One such business is known as Wishberry, based in India. It provides a reward-based model where the contributor gets no monetary return but instead gets special opportunities to try out the project they funded first or something along those lines. Wishberry also provides personal consultation, social media management, PR & publicity, email marketing, and global payments. I personally believe these services would help the SME grow further by creating customer awareness and attracting new customers. Wishberry charges a non-refundable fee depending on the amount you raise and it also charges a fixed rate of 9.5% along with a 2.5% transaction fee from the total amount of money raised. One unusual aspect that I noticed about the product Wishberry provides is if the SME does not reach its goal, they return all the money back to the funders and the SME is left, right where it began. They have justified this strange policy by guaranteeing a 70% success rate along with a statistic that stated those who don't have this all or nothing policy has a 10% higher chance of failure.
Another popular funding tool growing among entrepreneurs in India is the peer-to-peer (P2P) portal. It lets individuals and businesses lend and borrow from each other. Some of the benefits that follow this portal are low-interest rates and relatively less documentation. An Indian company that provides peer to peer lending is called the LenDenClub. It works by first approving businesses that need the money and then allowing institutions or individuals to lend money to that business. Once the funding is complete the business who borrowed starts paying back the principal amount along with an interest rate monthly. P2P lending is monitored by the RBI to reduce risk. P2P platforms must have a license to operate.
Venture Capitalists are used for businesses that want large sums of money. These are companies that invest in businesses that have huge growth potential and a lot of innovation. Nexus Venture Partners is a highly popular system that works with companies such as Zomato and White Hat Jr. It provides investments ranging from 500k to 1 million USD along with follow-up investments at later stages. Venture Capitalists act like a mentor company to the business they’ve funded, they give advice and evaluate the business’s sustainability. In return, they sit on the board seats of the companies that they have invested in. However, usually, VCs would want a return for their investment in three to five years to exit the company and also leave in the case of an acquisition.
Flexiloans aims to provide a digital platform for SMEs to acquire loans quickly and flexibly. They provide four products which include term loans, line of credit, vendor financing, and loan against POS. All their products require minimum documentation. The term loan’s amount can go up to one crore, with a facility tenure of 24 months. They require the business to pay back the loan on a monthly basis. It is an EMI based loan with no collateral required. A loan against POS varies slightly as the frequency of repayment must be daily. The eligibility criteria for business borrowing also differ. A line of credit is usually for businesses that have variable sales depending on the time of the year. It has a flexible repayment method and the interest rate is calculated based on the sales of the business. Vendor financing refers to enterprises that are suppliers to a large organisation and frequently raise invoices against their clients that usually take a long time to repay. Meanwhile, because the supplier is waiting for the money to be returned, the supplier can not expand their inventory or storage capacity. This can halt or delay the expansion of the business. Vendor financing aims to prevent this by offering a loan for a company's invoices or purchases. It allows a credit limit to go up to 90% of the invoice.
Another business that tries to make working capital available to small businesses is ZipLoan. They calculate the eligibility of the business that needs loans by asking about the assets the business has, how long it has been operating and the number of sales it has made in the past twelve months. It is essentially a credit facility that allows business owners to get funds within three days without any collateral needed. ZipLoan ensures loans up to Rs. 5 lakhs with flexible repayments and an online loan application. Some of its commercial products include MSME loans which start from Rs. 1 lakh, machinery loans used to expand the scale of production, and working capital loans to fund day-to-day expenses.
CoinTribe is another online platform that contains various algorithms that process data within minutes to get a business approved for its loan. It offers two main products including an instant business loan and a free credit report. The credit report won’t provide the business with finances, but instead, help the business understand their credit health so that they can improve it to get a loan from a bank or another financial institution. CoinTribe ensures complete privacy of data that a business provides to generate the credit report. It also helps businesses acquire loans from an interest rate of 16% onwards. 1% of the loan amount that can range from anywhere between one lakh and five crores goes towards a processing fee and the tenure spans from 12 to 120 months.
A business in India that provides a whole range of products spanning from invoice discounting to term loans and line of credit is called Indifi. Once again it helps solve cash flow problems by providing businesses with funding and virtually eliminating the need for collateral. Indifi provides invoice discounting to up to one crore and up to 90% of the total invoice paid immediately. It allows the SME to repay only when the buyer pays back the total amount, which is a very flexible system. To apply for a term loan at Indifi, the business must have at least two years of history and requires minimum documentation. It presents businesses with interest rates as low as 1.5% along with a 2.5% processing fee. Lastly, Indifi also offers a line of credit for those businesses with an irregular cash inflow. It is essentially an overdraft facility that allows a business to withdraw even if their account balance is zero.
Bigger Indian Businesses and SMEs
The two largest firms in India that hold a large accountable proportion of financial services include Bajaj Finance and Reliance Money. They both offer various products to SMEs that have distinctly different features, eligibility criteria, and interest rates. The table below focuses on comparing the SME business loans from the two firms:
||SME business loan
||SME business loan
- Loan limit of 30 Lakh INR.
- Collateral free and processing have done under 24 hours.
- Flexible payment methods.
- Tenure spanning from 12 to 60 months
- Online fund management
- Loans for different purposes including working capital and purchasing of assets.
- Flexible loan tenure and structured repayment options
- No financials needed for equipment loans up to 60 lakh INR
- No secondary collateral for equipment loans up to 2 crore INR
- Tenure ranges from six months to 48 months
Indian Banks and SMEs
|Products for SME
- Current accounts
- loans(full range of products in each of these)
- Credit cards
- Working capital
- Credit cards
||COVID-19 relief Package
||Business solutions and calculators
||2.25 lakh crore as in March 2017
||Rs 74,000 crore in March 2017
About The Author:
Hello! I’m Devashree Gupta, an IGCSE student from Inventure Academy. I have a keen interest in entrepreneurship and economics, and my interests include journaling and reading. I consider myself a motivated individual who is always happy to express her opinions, which may be extremely controversial at times. I enjoy being challenged and am always in the mood for a quick debate.