Small business financing is a factor that has a tremendous impact on the growth of the economy. Unfortunately, at the moment, SME financing in India is less than ideal. And today, in the light of the crisis facilitated by the COVID-19 pandemic, this problem has become even more poignant. Providing small and medium enterprises with the funds they need to get through these trying times can make a difference for the future of the country as a whole.
Global SME Financing and Its Impact on the Development of Countries
First of all, one must never forget that about 90% of all businesses in the world qualify as SMEs. This means that these enterprises have the highest level of impact on both the global and local economies. This considered, it’s not a surprise that countries, where conditions for small businesses are some of the best, make the top lists of developed economies.
According to Euler Hermes, today the top countries for SMEs are:
1) Canada
2) Singapore
3) The Netherlands
4) The USA
5) Germany
6) France
7) Hong Kong
One needs to note that among those, Hong Kong has the worst indicators for the levels of red tape and financing options.
The ease of obtaining small business financing is the deciding factor for many of these economies. Sadly, developing countries have the worst conditions for that. Not only are loans difficult to get there. But the loan options themselves are very limited. They also have unfavourable terms, which curb the ambitions of many entrepreneurs.
The versatility of business financing is also extremely important. This means that small business owners should be able to not only access “general” loans but also get help with specific needs. Those include the money to cover refurbishment or fit out of an office, also known as fit out finance. Another important type is equipment financing, which pays for expensive tools that a company needs to either launch or improve.
These specialized types of financing matter so much because they can provide businesses with more resources. They are also easier to acquire because the items purchased with their help are often used as collateral.
Why SME Financing Is a More Pressing Issue Due to the COVID-19 Pandemic
The tragedy that is the latest Coronavirus (COVID-19) pandemic is affecting the global economy harshly. It’s the hardest on small businesses, in particular. Millions of people are forced to stay at home because of the quarantine measures in many countries.
For small businesses, which often barely make ends meet, such measures are a death sentence. It’s very simple if they can’t work, they don’t get any money. Therefore, they are unable to pay their employees, and that’s not even mentioning other running expenses.
As a result, SMEs have no choice but to let some of their employees go or to close up entirely. Considering that these enterprises are the number one employer in any country, the consequences of such are disastrous.
With that in mind, it becomes obvious how important SME financing is at this time, in particular. At the moment, small business owners have literally no other source of funding. Therefore, to get through the slump, they must have loans that won’t break them entirely.
Again, developed countries, like the USA and the UK, offer specialized types of small business financing and aid to companies affected by the pandemic.
These funding options include, but aren’t limited to:
1) Sick pay relief packages
2) Small business rates relief
3) Grants for retail, leisure, and hospitality businesses (as the ones most affected)
4) Specialized loan terms to support affected SMEs
As so many businesses lose every way to generate some income in the quarantine conditions, this financing is a literal lifeline. Without it, they simply have nothing to keep them running as few small companies have enough liquid assets to get through extended periods of, basically, doing nothing.
However, as it is with the SME financing in general, the situation is so much worse in developing countries. Those governments are unable to offer such robust funding. Therefore, small business owners in India are facing huge risks during this globally trying time. Sadly, there is a high chance that a great number of them will not recover. Therefore, turning to any type of small business financing available might be their only choice.
The Limitations of SME Financing in India
India is not yet at the point where it can offer adequate small business financing, let alone the level needed in the time of this crisis.
The main problems in the SME financing sector in the country are:
1) Limited exposure from financial institutions that are capable of providing the needed funds.
2) The small size of loans, which is part of the reason for the lack of interest from the aforementioned institutions.
3) High costs of servicing the segment due to a poorly-developed infrastructure.
4) The absence of collateral, as the majority of Indian SMEs literally have nothing to offer.
All in all, the risk for financing providers in the country is extremely high. And the government offers no security for them. Therefore, one cannot truly blame potential lenders that they are cautious and offer so few options to the locals.
However, without money, small businesses have no opportunities for development. As such, they have no chance to grow stable enough to take out bigger loans and acquire some collateral.
Until this cycle is broken, the economic development of India, as a whole, is sure to remain stilted. But there is no effective way to break it as of now.
The appearance of smaller international lenders, that mainly operate online, can be a big factor in changing this situation. Traditional financial institutions reject all enterprises that they don’t find “commercially viable”. As their standards are very high, this means that the majority of SMEs are denied loans.
Independent lenders, on the other hand, have fewer requirements. Therefore, they can give money to more businesses, which means a direct infusion of strength into the economy. However, the limited infrastructure and awareness of this financing limit it today.
To have a better chance of finding a suitable loan, SME owners in India need to look beyond traditional financing offered in their area. They should look further to find specialized temporary solutions that will help them achieve their business goals one step at a time.
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