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
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
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.
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
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.
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.