MSME financing: What you need to know about funding your business

There are many other financing routes available to MSMEs, which do not enjoy the same popularity as traditional debt funding. Here is a list of MSME financing options: 

• Asset-based finance

• Equity financing

• Venture capital and angel investors

• Peer-to-peer lending

A major requirement for running most businesses is access to finance and credit. For micro, small and medium enterprises (MSMEs) the struggle to get funding is all too real. Issues with working capital, supply-chain, labour shortages etc. are often caused by a lack of access to funds. 

In India, loans from banks, non-banking financial companies (NBFCs) and micro-finance institutions (MFIs) are the traditional go-to finance options for small businesses. Many businesses also resort to slightly different funding routes at different stages of the growth cycle. In the early stages, they rely on personal funds, bank loans, and funds from friends and family for their funding needs. The Increased dependence on debt finance, followed by a mix of various new-age options such as crowd-funding and accelerators takes place in the growth and sustenance phases. 

In this blog, we try to delve into the different financing avenues available to MSMEs.

Debt financing: There is a clear preference among MSMEs towards debt financing in India. Loans are taken by firms from banks and financial institutions, often under various government schemes that aim to handhold MSMEs.

However, the debt finance landscape for MSMEs is changing. There is a gradual transition towards digital products and services. New-age digital-first fintech companies are making debt finance available to businesses in even the most remote parts of the country. Fully-digital (paper-free) processes, and rapid disbursal (within 24 hours with some providers) provide strong alternatives to traditional bank loans. Going to a bank for a loan is no longer a necessity. Just personal, business and bank details can provide access to funding overnight.

Secured Loans: Business assets act as collateral with asset-based, secured loans. Many banks offer business loans to steel manufacturers and distributors against machinery or property that they own. Loans can also be provided against accounts receivable, inventory levels and real estate.

Equity financing: A much-neglected area for MSMEs in India, equity financing allows organisations to raise capital against shares issued by them. Investors who purchase large numbers of these shares may also provide access to business contacts, other sources to capital and even management expertise to help the business grow.  Technology companies and the startup ecosystem have shown that equity funding can quickly ramp up business and capacity, leading to incredible growth.

Venture capital (VC) and angel investors: Stage-wise funding needs of MSMEs can be met via venture capital and angel investments. VC, angel investors, and high net-worth individuals (HNIs), invest in early-stages or developing businesses with scalable models. Cold-emails (direct email without the right introductions) and cold-calling might seem like a good idea. However, the chances of success are low. The best way to get in touch with either VCs or angel investors is via a personal referral and introduction. 

In the past, funding a business required either immense wealth or the ability to take on traditional forms of debt. This is no longer the case. Digital solutions, technological innovations and cutting-edge finance products are providing the framework for the growth of MSMEs in India. It is now time for Indian MSMEs to step up and deliver on their underlying potential.