What Are the Financing Options for SMEs

Micro, Small and Medium Enterprises (MSMEs or SMEs) are a powerhouse of the Indian economy. They together make up what is the second largest sector providing employment in India, employing more than 60 million people. SME sector is responsible for 45% of the manufacturing output and for production of more than 6000 products. Not only this, SMEs contribute towards 8% of the GDP.

The sector holds enormous potential for further development, but is largely unorganised with almost 94% of the industry falling in this category. There are many hurdles that are in the path of growth for SMEs Financing in India, and meeting the financing requirements is one of them. However, several financing options have cropped up to help small businesses get the necessary funding for their growth.

Business Loans for SMEs

Most SMEs opt for this loan as it comes with tenor options of short term, medium term and long term. These loans can be had for a tenor ranging from 3-30 years. The interest rate is based on the period the loan is taken for.

Bajaj Finserv offers such business loans at competitive rates and no collateral requirement, with a maximum amount of Rs. 30 lakh. These loans are used by small businesses to serve a variety of purposes, such as upgradation of infrastructure, expansion of operations and increase of working capital.

Line Of Credit

Line of credit is another popular option that is utilised when SMEs need funding, especially for the short term. In this arrangement, the financial institution sanctions a maximum balance that the borrower can access. This type of financing allows the borrower to access these funds anytime he needs, as long as he does not exceed the maximum amount and keeps paying the installment on a monthly basis.

This monthly payment is also on the lower side, as it requires only the interest to be paid (which is also levied on the amount actually borrowed and not on the credit limit), with the freedom to pay the principal at a later stage.

Bill Discounting

This option can be resorted to, when urgent financing is required. In this mode, the bills that are generated for the purpose of receiving payments from debtors are taken to the bank by the seller. The bank then calculates the payable amount by discounting the prevailing interest rate from the total amount.

In this way, the seller does not have to wait for the bill to mature in order to collect the payment. When the bill reaches maturity, the bank will approach the debtor and collect the money from them. These loans are easy to procure as they don’t require any authentication or collateral.

Angel Investors

These investors are people who have extra cash with them and are looking for investment opportunities. They usually work in a networked group and demand a certain percentage of equity in the business, in return for their investment. They invest amounts smaller than what venture capitalists can come up with, but are more comfortable taking a higher degree of risks with their money.

Angel investors are seasoned businesspersons and can also give useful advice apart from the funds. Small businesses can utilise this finance option to further grow their company.

Also Read:  All You Need To Know About SME Loans In India

Equity Finance

This method can be used to raise a large amount of money for your business and is ideally used to achieve long-term growth. This process requires selling shares of the company to the public, investors and other financial institutions. The people who buy the shares are called ‘shareholders’ and acquire an ownership interest in the business.

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