Key Reasons Why SMEs Never Raise That Capital

August 10, 2014

Key Reasons Why SMEs Never Raise That Capital

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Indian Small and Medium Enterprises are facing a number of hurdles in achieving the growth they want, and the recent global economic crisis only adds to these problems. Of the several problems that prevent the Indian SMEs from growing at an unprecedented rate, given the Indian conditions, financial remains top most (internationally idea and people are possibly more critical). These hurdles include lack of working capital finance, lack of financial support from banks, high interest rates, and tough government policies.

The global economical crisis has seriously affected the fundraising capabilities of SMEs and thus it becomes all the more important to go after funding aggressively and adopt new methods for fundraising.

The key reason why most SME’s are not able to raise capital is because their financial thought is not committed on paper. Preparing a successful financial plan is the most important activity in fundraising, which includes reviewing your current financial position, understanding your requirements, and purpose of funds. Seek help from financial advisory services if required.

The other key reason why SME’s are not able to raise capital is because the owner/entrepreneur doesn’t treat it as a core activity. To raise capital somebody at the top needs to devote 20-30% of his time to this activity.

Fund raising is a goal driven and not a number driven activity. You can prepare detailed plans for deciding the finance required, expected return on investment (ROI), investment tenure, etc. The financial plan should also include details of other finances sources including the owner or management team. Also state how you can keep expenditure under control to improve efficiency and productivity. Show the end result of what it will be when the funds have gotten used. Look at Technology, Market, and Execution apart from finance.

Fundraising begins at home. Though most entrepreneurs have started with their own savings, fundraising truly begins at home.

  • Bootstrap, every rupee is precious, put money only in the core areas
  • Capital from family members, partners, friends.
  • Generating cash from the existing business
  • Freeing up cash from the existing business
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Look at both Debt and Equity. Though equity is clearly the costliest way of raising funds, in today’s scenario of high levels of collateralization and interest rates it makes sense to explore both options. Get hold of a CA or financial advisory to help you with debt. Depending on the size of business, how long the business has been running, and collateral availability debt routes include:

  • SIDBI, credit guarantee insurance scheme
  • Govt subsidies and grants
  • Project finance
  • Bank OD
  • Term loan, WC loan
  • Expansion loan

What you need for raising debt includes:

  • Last three profit/Loss and Balance sheet including 2011-12. If the financials are not audited for current year, prepare provisional’s.
  • Business profile of co.
  • Details of security available
  • Loan amount required and purpose
  • Existing loan sanction letter if any loans are running.

Equity, the idea of diluting stake in the organization in exchange for capital does easy of interest burdens. Get hold of an investment banker. Depending on the quantum of money desired to be raised, routes include

  • Angel investors, partners
  • Seed funds
  • VC
  • PE
  • IPOs: Recently both BSE and NSE have initiated the SME exchange akin to the regular exchange.

A well thought out business plan is key to raising equity.

From one SME owner to another, stay out there, stay optimistic and keep trying to raise capital for growth.

 

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