Contributed by Nishant Pathak, Knowledge Buddy
There are over 13 million SMEs in India, providing employment to 42 million people. From these figures an outside observer can easily state the fact that we are in fact an SME driven nation. Yet we can clearly see that in India almost everyone is obsessed with large businesses and Multi National Corporations. India has always been in denial when it comes to dealing with its SMEs. Even then SME’s in the last decade have shown a growth higher than the national growth rate.
In a study conducted by Milagrow Business and Knowledge Solutions, it was found that 74% of the sick SMEs in India attribute their sickness to the fact of low availability of funds. Which is not surprising, as the same study also showed that 92% of all SMEs interviewed are dependent on personal or family savings.
In this light let us explore a few areas of external funding that SMEs can explore.
Bank Loans
Bank loans have been the most traditional way of securing funds for SMEs in India. However since the beginning of the economic recession, bankers have curtailed lending to SMEs due to the greater risk of non-performing assets (NPAs). Moreover, large firms that raise funds through both the capital market and banks have turned increasingly to banks, ever since the capital market crashed at the beginning of 2008 — thereby offering banks a line of business that is more lucrative than lending to SMEs, according to a recent World Bank Report.
This trend is worrisome in light of the fact that most of the SMEs in India only rely on Banks to secure funds.
Private Equity Funds
Private equity firms are targeting Indian SMEs in a big way. For this financial year they are poised to invest close to $5 billion in to SMEs in India, this figure makes up 70% of their total investments in India. Another advantage of PE firms lies in the fact that they not only bring capital but experience and expertise from established businesses. They expose their portfolio companies to best in class practices and work extensively to see that they are implemented into the organizations that they are funding.
However in India we often see resistance from SMEs when it comes to Private equity firms, one of the main reasons for this is Indian SMEs, which are primarily owner driven or family owned are hesitant to let someone else tell them on how to run their own business. This combined with lack of good valuation limits their role in finding SMEs.
Angel Investors
