More than manufacturing or service innovation, what the MSME sector needs sorely today is financing innovation. Enterprises cannot grow optimally if financial products in the system lack ingenuity and flexibility. This is because, an enterprise has to go through various stages of evolution to make a mark in its sphere of business. Naturally, the funding mechanisms also have to be as dynamic as the business environment of the enterprise.
But for historic reasons, the funding mechanisms in India is relatively rigid and narrow. The demand for innovative ways of funding was heard at the recent Ficci MSME Summit 2012 on innovation and clusters, held in New Delhi. The banking sector should introduce new and relevant financial products that address the business cycle of MSMEs, said Sanjay Bhatia, chairman of the Ficci MSME committee. Along with this, alternative funding routes like angel funding, venture capital and private equity should be made readily available for MSMEs, Ficci demanded.
But funding is a two-way street. Credibility of the borrower and transparency in his transactions are as vital as the flexibility of the financial product. Ficci rightly recognised this and suggested a few strategies for enterprises to overcome banks bias against lending to small enterprises.
Some strategies, listed in the Ficci-IIFT (Indian Institute of Foreign Trade) knowledge paper, are recounted here:
Establish a strong accounting system:Investing in a strong accounting and reporting system from the day of incorporation or before will bring in long-term multiple benefits to the enterprise.
Detailed business plan: The more detailed the business plan the better the chance of a loan getting sanctioned. Free resources are available on the Internet to do this.
Mandatory disclosure of information:Proactively disclose financial and company information. It creates a notion that the business is clean. Lenders get an assurance that they will be kept in the loop about the functioning of the business.
Strategic local or foreign partners:Having a strategic partner in business is always desirable provided both can work in unison. The other partner often brings specific strengths to the enterprise. In case of exports, partners with multiple country presence would be ideal.
Sell/outsource part process like distribution, post-sales.To manage costs, enterprises should lookout for partners/ franchisees who can share or manage a part of the functions like distribution or post-sales service.
Strong organisation structure:A well-defined organisation structure with a clear chain of command for information flow as well as financial decisions will help the lenders understand how decisions will be made in the firm.
Succession planning:SMEs are often one man-shows. What happens if the man falls ill or expires Lenders should be notified about the second rung that would take over key functions in unforeseen circumstances.
Strong cash flows and receivables:Enterprises are sometimes so consumed with sales that they lose track of receivables. A well-defined system of debtor management should be established. An analysis of outstanding while processing purchase orders should be internally set in stone. Lenders look at cash flow, and not just pure sales.
Use of ICT: Information and communication technology helps establish a process and transaction trail. A proactive adoption of ICT brings transparency and helps in sharing information with the lender.
Display good corporate governance: There is nothing better than demonstrating honesty and openness in business. It can be done through certifications like ISO, HAZOP and other specific certifications. Proper filing of financial records creates a good image of the enterprise with the lender.
Use of retained earnings:Whatever is said and done, businesses bank on retained earningsproviding for a well-balanced debt-equity ratio. When equity is large, lenders get the message that the owners are equally serious.
All transactions through bank:All cash transactions should be replaced with a system of cheque/electronic transfer of funds so that the lenders are assured of a trail of fund usage.
Tap trade credit:Work towards building a relationship with your suppliers to get a good credit period. Even an additional 10 days make a huge difference to the working capital needs.
Show persistent growth:All lenders seek companies with good health and steady growth, of not exponential in nature, to feel secure about their finance.
If enterprises follow these thumb rules and the financial system comes up with flexible financing packages, much of the problems haunting the MSME sector would be resolved. This will automatically promote manufacturing and service innovation. Because, innovation thrives only when the generalnot specificfinancing environment is conducive.