A modern economy is like a large engine. Small and large businesses are like the various gears and wheels that work in tandem to keep the economy humming. If one goes by media coverage, it may seem that only large corporations contribute to economic growth. The reality, however, is different. MSME business makes up 29% of the GDP and provide employment to millions of workers. Every major economy has a vibrant and growing Micro, small and medium enterprises sector. MSMEs in India, however, face a number of difficulties. The primary among them is the lack of adequate liquidity.
The growing formalization of the economy has led to improved chances for small companies to raise funds. A number of non-traditional equity and debt financing options have opened up for businesses.
The bulk of equity capital is targeted at early-stage MSMEs, even though the business model is unproven. Equity is risk capital so investors chase opportunities with the highest prospects of returns. Enterprises in the early stage of growth offer the highest potential for capital appreciation while mature enterprises have a constrained growth trajectory, offering stable but lower returns. Venture capital and private equity are some of the most popular equity funding options. Venture capitalists and private equity funds provide financial assistance through equity or equity-linked investments. The process of getting capital through equity can, however, be lengthy and complex. Reluctance to cede control, mismatch in valuation, and the capacity to absorb the capital are major issues while seeking equity-linked financing.
Several changes over the years has made the capital market more accessible to individuals as well as small companies. Dedicated stock exchanges were set up to help small companies raise capital through equities. SME stock exchanges operate under-recognized exchanges like BSE or National Stock Exchange. An MSME can get listed on the SME exchange after reaching a certain level of revenue. A number of small and medium companies have raised funds through the SME exchange, but accessing the capital markets can be tricky as companies have to take care of a host of regulations and compliance.
Along with equity capital, MSME companies also have the option of debt capital to get more liquidity in the business. How? This is where CredAble is doing some real work where we can finance their receivables and payables as well.
Just like venture capital, there are venture firms that offer capital as debt. Venture debt is structured as a term loan, however the tenure and repayment schedule is structured as per the requirements of the MSME Business. Generally, venture debt tenures range from six months to three years and the interest rate cost is between 1% and 15%. This is accompanied generally by warrants/equity options issued by the Micro, small and medium enterprises in favor of the Venture Debt fund.
Innovative financing options are available to provide liquidity to smaller companies. Factoring is a type of receivables financing where the company sells its entire receivables account to a financing firm at a discount in exchange for funds. The receivables account is the sum total of all the pending invoices, and it acts as a security for the financing firm. The financing company or factor has to ensure the credibility of the customers.
It is a receivable financing option, just like factoring but with certain differences. In the case of factoring, companies have to sell their receivables account to factoring firms. However, in the case of Just-in-time Financing, one does not have to sell the receivables account to another company. Some new-age just-in-time financing companies like CredAble provide funds at the pre-invoice stage and post-invoice stage. With funding based on milestones and billable events such as Proof of Delivery (POD), Goods received note (GRN), CredAble helps small companies manage liquidity with ease.
Purchase Order Financing
Purchase Order Financing is a short-term commercial finance option that provides capital to pay suppliers upfront for verified purchase orders. It allows companies to accept unusually large orders and adjust the loan basis up/down quickly to meet needs. New age fintech players such as CredAble offer pre-shipment financing options such as Purchase order financing solution, which is Collateral free borrowing for suppliers of all sizes.
Supply Chain Finance
Companies can opt for supply chain financing options to receive short-term credit. Both bank and non-bank sources provide these liquidity enhancing products. Small as well as large suppliers can get access to funds on the basis of the invoices they raised for goods or services. To avail of supply chain financing options, MSME business has to ensure that the supplies are regular and creditworthy customers with a proven payment track record.
Peer to Peer Financing
A number of online platforms have emerged that bring individual lenders and borrowers together. It is a peer-to-peer system and it ensures the availability of short-term capital without the involvement of formal institutions.
The combination of technology and capital has led to the introduction of a number of innovative financing solutions. Fintech companies with the help of new-age technologies like artificial intelligence, big data, and machine learning have brought easy financing options for MSME Businesses.