Sunday, January 1, 2012

Access to funds for SMEs remain key challenge

Access to funds for SMEs remain key challenge

The Government of India’s recent announcement of its intent to increase its market borrowings by Rs. 40,000 crores to fill in the sluggish tax collections gives a clear signal that interest rates will continue to remain high in the short to medium term. In this challenging economic environment, access to funding and cost of funds are two key aspects that every SME entrepreneur should manage effectively to maintain the health of the enterprise. Few proactive measures can go a long way in helping entrepreneurs manage their financial requirements in a cost-effective manner. These include

Multiple banking arrangements

SMEs should strive to nurture its relationship with more than one bank on a continuous basis, especially when their liquidity position is healthy.  Many healthy and well-performing SMEs have faced crisis situation because of tight liquidity position of their bankers, who may suddenly go slow in enhancing their credit facilities, thereby choking growth opportunities for the SME. Though multiple banking arrangements involves slightly higher effort as well as cost in terms of processing fees, commitment charges, etc., the benefits far outweigh the downside of depending on single bank. 

NBFCs lend aggressively to SMEs

In the current financial market, NBFCs are the only players that are aggressively expanding their asset books and specifically target SMEs to reach their business commitments. Though cost of funding through NBFCs are slightly higher – usually by 1% to 1.5% higher -  the terms of funding such as security / collateral requirements, structured repayment terms, etc. are more benign compared to their banking counterparts.  SMEs that have a healthy banking relationship can tap NBFCs for additional fund-based facilities such as working capital term loans, besides other traditional NBFC-products such as vehicle and equipment financing.

Tapping Commercial Paper market

Commercial Paper (CP) is a very useful instrument for corporates to reduce their interest costs. CP market in India has grown rapidly in the last two years – from less than Rs. 40,000 crores in 2009 to over Rs. 1.4 lakh crores currently.  CP is essentially a replacement borrowing for working capital funding, with substantial interest savings, which are as high as 3-4% for well-rated corporates. However, CP market is open only for corporates with high credit worthiness, and is of reasonable size. Of late, many investors are keen to subscribe to Commercial Paper issued by new entrants, which augurs well for highly rated corporates that are yet to enter capital markets.

A common feature of turbulent times like this is the stretching of the turnaround time for obtaining any fresh funding. In the current market, any new debt facility for an SME could take over 2 months, while fresh equity infusion could take as high as 6-9 months. Entrepreneurs should plan well in advance to take into account this stretched timeframes, to avoid serious liquidity problems.
 N. Muthuraman is Director, RiverBridge Investment Advisors Pvt. Ltd., a boutique financial advisory firm and can be reached at 

This is the blog of the Print Version published in Business Line dated 2nd Jan 2012

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