SME’s are developing rapidly and flourishing enormously worldwide. Since its initiation and establishment, there some extremely important and basic requirements to be met and adopted. These requirements include; infrastructure and employment requirements, a developed information technology infrastructure along with funding sources, which is the most important aspect of the sustainability of these SME’s.
Funding sources are the strengthening pillars for such small and medium-sized enterprises.
SME (small to medium enterprise) is a convenient term for categorizing businesses and other organizations that are somewhere between “small office-home office” (SOHO) size and the larger enterprise.
Unavailability of timely and adequate funds has an immense adverse effect on the growth of these SME’s which in turn affects the growth of the Indian economy. Such insufficient funding sources serve as the crucial barrier in the development and sustenance of SME’s.
The economic development in India is hugely dependent on the performance of small or micro and medium enterprises. They are the powerhouse of innovation, entrepreneurial spirit and enormous talent, which is required for the nation’s development in the economic sector.
Indian SME sector:
This sector contributes to the industrial output, provides employment to masses. They also contribute widely in exports. These organizations produce quality products for national and international markets.
The presence of SME’s is greatly acknowledged. The manufacturing sector is rapidly advancing because of the contribution of these organizations.
Undoubtedly, these SME’s are performing their best, despite their limited sources. Still, there are multiple cases of these organizations facing funding issues.
The solution for funding issues faced by SME’s:
The government has been taking initiatives like setting up the National Manufacturing Competitiveness Council, announcing National Manufacturing Policy (NMP) and much more to energize and boost the manufacturing sector.
Banks have made stable strides to support SME’s. However, such approaches by banks for funding are limited and restricted because by controlling and managing risk, they ultimately create value. Thus, banks are not always a rightful solution as a funding source.Access to capital markets is rare, in the case of SME’s. Therefore, such organizations hugely depend on borrowed funds from some financial institutions and banks.
Mostly commercial banks provide extended working capital and financial institutions provide investment credits. Universal banking services, working capital, and term loans are becoming available for SME’s for funding.Meanwhile, the traditional requirements of finance are still actively in use, for creating the asset and working capital.Globalization is generating a demand for introduction and development new financial and support services.
The RBI should issue necessary guidelines to all banks on credit flow. Moreover, the Government should work rigorously to create an environment conducive for growth for the SMEs that restrains the need for capital and debt.
Setting up SME-targeted banks that provide priority to lending to the SME sector.
Financing schemes for SMEs can be formulated and be beneficial. These might be highly risky, but promises great returns. There is also a need for a reduction in the interest rates. SMEs has been paying high-interest rates for bank loans. The loan structure should restructure, on an urgent basis as lower interest rates are an extremely important need for SME’s.
Delayed payments are yet another major area of concern for SME’s that lead to reduced working capital.
Recycling of funds and various business operations are majorly affected due to delay in dues settlement. Defaulting customers are mostly large enterprises and the SMEs due to fear of losing business are not able to report against them.
An automated portal could be established by the government, wherein SMEs makes available their customer detailings.The government can also send automated reminders to defaulting organizations, in the cases of payment defaults.
As it is well known all over that, for the government, the Budget is an occasion to set up new financial goals and economic goals, allocate financial resources and provide policy directions. During Budget presentations, the Finance Minister announces new policies, schemes, projects and allocates finance for the development of several sectors of the economy, to meet the overall goals of socioeconomic growth.
For SMEs, the potential sources of finance are very limited. However, their usefulness is limited because of mostly practical problems. Crowdfunding also supplies chain financing are some funding sources.
Some more funding sources for SME’s
The owner, family, and friends of SME
An excellent source of finance. Mostly, such investors, invest not just for financial gains and are willing to accept lower returns than other investors. However, the key limitation, for most of these organizations, is that, that the finance they can build personally, from friends and family, is limited.
SMEs can take credit from their respective suppliers. It is however just short-term and, if the suppliers are big companies who have identified and categorized them as potentially risky SME, the possibility to extend may be limited, for the credit period.
The business angel
A wealthy individual who is willing to take the risk of investing in SMEs. However, they are just found in rarity. Once such an individual is interested they can become useful to the SME, as they have great business plans and contacts.
Factoring and invoice discounting
These sources help the organizations to raise finance. It is only short-term and is mostly more costly than an overdraft. However, with the SME growth rate, their receivables will grow thereby the amount they can borrow from invoice discounting will also rapidly growing.
Leasing assets is a better option rather than buying.them, as it avoids to raise the capital cost. However, leasing is mostly possible on tangible assets.
An SME can become quoted by acquiring a listing on the stock exchange. Thus, raising finance would become less of an issue. But before listing can be considered the organization must grow to the considerable size that a listing is feasible.
Supply chain financing
SCF is new and is somehow different than the methods of traditional working capital financing, such as offering settlement discounts, as it promotes collaboration between the buyers and sellers in the supply chain.
The venture capitalist
A venture capitalist organization is mostly a subsidiary of a company that has worthy cash holdings and might need to be invested. Such subsidiaries are at high-risk, potentially high-return part of their investment portfolio. To attract venture capital funding, such organization has to have a business strategy and idea, that may help to create, high returns that the venture capitalist is seeking. Thus, operating in regular business, venture capitalist financing may be impossible for many SME’s.
The above mentioned are the various solutions for SME’s to deal with the issue insufficient funding sources.