Introduction
SMEs, or Small and Medium Enterprises, are businesses that have less than 500 employees. They make up 99.9% of all companies in India and contribute more than half of the country's gross domestic product (GDP). However, despite their importance to the Indian economy, SMEs face numerous challenges when it comes to funding their operations. In this article we'll go over some financing options available for small businesses in India - whether they're setting up a new company or expanding their existing one - so you can choose which financial strategy works best for you!
What are SMEs?
Small and medium-sized enterprises (SMEs) are defined by their size, not by their industry. These privately owned businesses have annual revenues of between €1 million and €50 million. For example, a large enterprise might be in the manufacturing sector and employ hundreds of people; a small business could be in retail, with only a few employees on payroll. The main point is that SME is not an industry-specific term: it encompasses any private enterprise that isn't part of a larger corporation or government agency.
Traditional options for SME Finance
Traditional financing options for SMEs include:
Accounts Receivable Financing
Supply Chain Financing
Reverse Factoring
Invoice Financing
Accounts Receivable Financing
Accounts receivable financing is a type of asset-based lending that involves a business selling its accounts receivable to a lender. The lender makes an upfront payment to the business owner, and then receives payments from the customers whose invoices have been sold. The sales price is usually determined by factoring in the dollar value of each invoice, plus some extra money for administrative fees and profit margin.
The business owner continues collecting on the debt from customers and repays their loan over time, paying interest monthly or quarterly at an agreed-upon rate.
Supply Chain Financing
Supply chain financing is a type of capital financing that involves the funding, arranging and managing of cash flow for suppliers to a company. Supply chain financing is often referred to as “supply chain financing” or “KPO” (key performance obligation).
The main aim of supply chain finance is to help companies reduce their working capital requirements by using third-party providers to provide loans against their receivables.
It differs from trade finance in that it does not involve international payments and has more flexibility around who can claim on the funds, but this type of finance does require good creditworthiness from both parties involved - supplier and customer - due to the high risks associated with non-payment.
Supply chain finance providers include banks, non-bank lenders and leasing companies.
Reverse Factoring
Reverse Factoring is a form of factoring that provides cash advances to businesses on their accounts receivable. This type of financing solution has become increasingly popular as SMEs struggle to obtain traditional bank financing and face a challenging business environment.
Invoice Financing
Invoice financing is a quick and easy way to borrow money from your outstanding invoices. It’s a flexible, short-term solution that can be used to bridge cash flow gaps or fund growth.
Unlike traditional bank loans, invoice financing isn't based on your credit history or business performance but instead allows you to use the money owed by your customers as collateral for the loan. You receive funds immediately upon receipt of an invoice and only have to repay the principal amount once the customer pays their bill—no matter how long it takes them!
Conclusion
Financing options for small and medium-sized enterprises are varied, and can help you get the funding you need. With so many options available to you as an SME owner, it’s important that you know what each one entails before making a decision about which type of financing will work best for your business.