Financial Instruments for SME Financing

SME financing comes as a challenge in India as banks have categorised them as high-risk borrowers. However, with internet penetration and technological advancement, businesses can access a range of financial instruments.

As a result, India has seen a massive increase in the number of startups. Moreover, the rise of fintech companies has strengthened the alternative financing sector, which has further helped the growth of the SME sector.

List of Financial Instruments for SME Financing

Let us look at some important instruments of SME financing:

  • BNPL (Buy Now, Pay Later)

    BNPL is a short-term financing option that fulfils the needs of both buyers and sellers. After the buyer opts for the BNPL option during checkout, the seller ships the product and receives payment from a BNPL service provider. Buyers have to repay the third-party lender in instalments.
    KredX is a supply chain financier that provides Pay Later services for all sorts of business buyers. With KredX Pay Later for businesses, SMEs can get instant credit while sellers get fully paid upfront.

  • Term Loan

    Term loans can be secured and unsecured, and a company's credit history determines its eligibility. Often, businesses avail a term loan for a specific reason, for example, capital spending. As a result, this is one of the most popular financing options for many businesses.

  • Working Capital Loans

    Businesses avail this type of loan to cover the expenses of their daily operations, such as covering accounts payable and payment of wages. In addition, it helps businesses keep functioning during off-seasons. Most common borrowers include distributors, retailers, manufacturers and content providers.

  • Invoice Discounting

    Invoice discounting is a popular SME financing facility where a seller leverages unsettled bills to receive credit from banks. The seller must repay this amount with interest after receiving credit. The availability of fast cash with no collateral is an essential benefit of invoice discounting. SMEs facing a credit crunch can use the invoice discounting service of KredX to get cash immediately.

  • Line of Credit

    A line of credit (LoC) is a credit facility that allows borrowers to regularly borrow and repay the money within a preset limit and tenure. Interest is only payable on the fund that a business borrows, which makes it more affordable than standard loans.
    Another feature of LoC is that businesses can utilise the required amount only. This financing option benefits startups and smaller businesses as they can borrow less and operate with low risks.

  • Equipment Financing

    SMEs can opt for equipment financing when they acquire new equipment for their business. It is available in the form of loans and leases. Businesses that can afford to make down payments can opt for equipment loans. Leases are ideal if the equipment needs to be changed regularly.

  • MSME Loan by SIDBI

    SIDBI (Small Industries Development Bank of India) launched this scheme where loans up to Rs. 10 crores will be approved in 59 minutes. The Government of India has authorised 5 PSU banks to sanction such loans. Eligible applicants are small and medium-sized business owners who need capital immediately.

  • MUDRA Loan Schemes

    The GOI has launched MUDRA (Micro Units Development and Refinance Agency) schemes to benefit the MSME sector. Small businesses and new ventures can avail loans up to Rs. 50,000 under the Shishu plan.
    MSMEs and startups that fall in the mid-range can borrow up to Rs. 5,00,000 under the Kishor plan. Meanwhile, the Tarun plan enables established MSMEs to avail of a maximum of Rs. 10,00,000.

Bottom Line

Though SME financing was a great challenge in the earlier days, it isn’t so anymore. Constant development in the finance sector has made accessing credit easier for smaller businesses. Moreover, the rise of fintech services holds the promise of greater financial inclusion in India.