Financing is crucial for any business to run and grow. The finance pillar of a business must be strong to make it a successful business. Especially when it comes to startups or small businesses, SME financing becomes the utmost important factor in meeting business objectives.
Money is always the most concerning element when it comes to funding or financing a startup. While starting their business, business owners might need more funds to carry out operations smoothly. Hence, SME financing is the most favourable option for them.
In this article, we will learn about SME financing and the options available for SME financing in India. Apart from that, we will look into the MSME expansion in India and how they are contributing to the country’s GDP.
What do You Mean by SME Financing?
As mentioned earlier, the amount pooled by the SME owner needs to be increased to meet its financial requirements. Hence, external financial assistance is required.
SME financing, also known as SME funding, is the provision of financial resources specifically designed for Small and Medium-sized Enterprises (SMEs). It aims to provide access to capital for small businesses with limited financial resources or who need help accessing traditional funding sources.
SME financing is an essential part of the economy, as it helps promote small businesses growth and sustainability, which are crucial drivers of job creation and innovation. SME financing can take different forms, including debt, equity, crowdfunding, grants and subsidies, and invoice financing.
Options Available for SME Financing in India
- Equity Financing
For SMEs and startups, equity financing is one of the most common ways to raise capital without debt. This approach involves selling company shares to interested investors in exchange for money. These investors become shareholders of the SME or startup. Additionally, they have a say in the company’s decision-making process.
2. Debt Financing
Debt financing is another standard method for SME funding. It is when SMEs borrow money from a lender, such as a bank or any financial institution, to finance their operations or specific projects. The lender determines all the loan terms, including interest rates and repayment periods. SMEs can obtain loans or lines of credit to fit their financial requirements. They are obligated to make regular payments until the loan is fully repaid.
3. Legal Grants
SMEs can also acquire funds from the government or any non-profit organisation. These funds are known as legal grants. And these grants are usually awarded to SMEs that are working on projects that align with the goals of the organisation providing the funding. Unlike other financing methods, SMEs don’t need to repay these grants. Nevertheless, these grants come with specific conditions. The conditions may include reporting requirements or restrictions on how the funds can be used.
4. Crowdfunding
In crowdfunding, funds are raised from many individuals through an online platform. Small and medium-sized enterprises (SMEs) can effortlessly initiate a crowdfunding initiative aimed at drawing in investors keen on backing their distinct business concept.
5. Invoice Funding
Invoice funding, also known as invoice financing or invoice factoring, is a financing solution that SMEs can use to improve their cash flow. It involves a third-party financial institution purchasing an SME’s outstanding invoices at a discounted rate. It provides the SME with immediate access to the funds its customers owe it. The financial institution then collects the total amount owed from the SME’s customers.
6. Venture Capital
Venture capital is the SME funding mechanism of raising capital from specialised investors. These investors seek high-growth potential in exchange for equity in an SME or a startup. Venture capital is typically used by SMEs that have already established their business and are looking to expand rapidly.
MSME Expansion in India
According to statistics of the Ministry of Micro, Small & Medium Enterprises (MSMEs) on November 25, 2022, the Udyam Registration portal has recorded the registration of 12,201,448 MSMEs, replacing the earlier method of filing for a Udyog Aadhaar Memorandum (UAM). Of the total registered MSMEs, micro-enterprises accounted for 96.17% or 11,735,117, while small enterprises constituted 3.49% or 426,864, and mid-sized enterprises constituted 0.32% or 39,467.
Best SME Financing for Startups
The small and medium-sized enterprises (SMEs) in India have significantly contributed to India’s economic growth. However, to expand their businesses, SMEs require adequate financing. HDFC Bank provides financing solutions to assist SMEs in managing their cash flow challenges. Furthermore, HDFC offers sufficient financial support to help business owners.
For SMEs seeking financing to expand their businesses, HDFC Bank is the ideal option, given its comprehensive range of features and services. HDFC Bank provides working capital services throughout India, with the convenience of multi-location banking. SMEs can choose fund-based and non-fund-based financing, including cash credit, overdrafts, etc. In addition, the SME bank offers term and business loans with flexible repayment options. Business loans up to 50 lakhs are offered.
