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FINANCING OPTIONS FOR SMALL AND MEDIUM ENTERPRISES (SMES)
Mrs.Neerja Vishal Sharma Abstract
Small and medium-sized enterprises are observed as capable instruments to solving the critical problems of development and poverty affecting most developing countries (Kayanula and uartey !"""# Mead and $iedholm %&&'# (ischer %&&)*+ therefore the need for their gro,th in Nigeria is beyond -uestion. .midst many other problems+ gaining access to ban/ credits and other financial mar/ets have been identified as a /ey hindrance to this gro,th. 0his research tried to revie, this challenging problem of SM1s financing in Nagpur ,ith a vie, of identifying alternative financing options besides the traditional ban/s credit system. 2t also ta/es a loo/ at Non-ban/ financial institutions as one of such alternative options of financing for SM1s.
Key words: Small and Medium Enterprises in India Introduction SME finance is the funding of small and medium sized enterprises+ and represents a major function of the general business finance mar/et 3 in ,hich capital for different types of firms are supplied+ ac-uired+ and costed or priced. 4apital is supplied through the business finance mar/et in the form of ban/ loans and overdrafts# leasing and hire-purchase arrangements# e-uity5corporate bond issues# venture capital or private e-uity# and asset-based finance such as factoring and invoice discounting. 6o,ever+ not all business finance is e7ternal5commercially supplied through the mar/et. Much finance is internally generated by businesses out of their o,n earnings and5or supplied informally as trade credit+ that is+ delays in paying for purchases of goods and services. Importance 0he economic and social importance of the small and medium enterprise (SM1* sector is ,ell recognized in academic and policy literature. 2t is also ac/no,ledged that these actors in the economy may be under-served+ especially in terms of finance. 0his has led to significant debate on the best methods to serve this sector. .lthough there have been numerous schemes and programmes in different economic environments+ there are a number of distinctive recurring approaches to SM1 finance.
4ollateral based lending offered by traditional ban/s and finance companies is usually made up of a combination of asset-based finance+ contribution based finance+ and factoring based finance+ using reliable debtors or contracts. 2nformation based lending usually incorporates financial statement lending+ credit scoring+ and relationship lending.
1=>* 0here have been at least t.u i r e d .ith insufficient collateral. 0here are other SM1s being setu p p u r e l y a s a m e a n s o f e a r n i n g l i v e l i h o o d .ith the business itself+ the aim has been to provide better general businessdevelopment assistance to reduce ris/ and increase returns. (a) Born out of individual initiatives & skills SM1 startups tend to evolve along a single entrepreneur or a s m a l l g r o u p o f entrepreneurs# in many cases# leveraging on a s/ill set.hile most countries continue SM1s to manufacturing services+ othersadopt a broader definition and include retailing as . 0hus+ the second approach has b e e n t o b r o a d e n the viability based approach. (b) Greater operational flexibilit . 0he SM1s that fall intothis category have been defined as Small . yo r / for governance #enterpreneurship =development (. 0his has led to claims of an 9SM1 finance gap:. e n e v a in july !""' + hosted by the n e .<s* at a .ro. Since the viability based approach is concerned .2 • • Viability based financing is especially associated . 0he first has been to broaden the collateral based approach by encouraging ban/ lenders to finance SM1s .0 h i s m i g h t b e d o n e t h r o u g h a n e 7 t e r n a l party providing the collateral or guarantees r e .ing <usinesses (S.o d i s t i n c t i v e a p p r o a c h e s t o t r y t o overcome the so-called SM1 finance gap.or/shop in. 0 h e s e i n c l u d e s m a n y t r a d i n g a n d r e t a i l establishments .ell. SME Financing Gap . 8eliable for all the small tic/et loan. substantial portion of the SM1 sector may not have the security re-uired for conventional collateral based ban/ lending+ nor high enough returns to attract formalventure capitalists and other ris/ investors.ith venture capital. 2n addition+ mar/ets may be characterized bydeficient information (limiting the effectiveness of financial statement-based lending andcredit scoring*. ? n f o r t u n a t e l y + t o t h e s c h e m e s c o n c e r n e d r u n c o u n t e r t o ? n f o r t u n a t e l y basic free market principles they tend to be unsustainable.
0his translates to lo. (f) #ig$ e&plo &ent orientation% SM1s are usually the prime drives of jobs+ in some cases creating up to '"@. <y beinga b l e to meet niche re-uirements+ they are also able to capture e7port mar/ets .er overheads.ith flat hierarchical structures and lessnumber of people ensure that there is greater operational fle7ibility. >ecision ma/ingsuch as changes in price mi7 or product mi7 in response to mar/et conditions is faster. (d) #ig$ propensit to adopt tec$nolog 0raditionally SM1s have sho. (c) !o" cost of production SM1s have lo.3 0he direct involvement of o.ner(s*+ coupled .overnment >epartments+ <an/ing Sector+( i n a n c i a l 2 n s t i t u t i o n s a n d 4 o r p o r a t e S e c t o r + . (g) 'eduction of regional i&balances ?nli/e large industries .here divisibility of operations is more difficult+ SM1s enjoy thef l e 7 i b i l i t y o f l o c a t i o n . Aobs SM1stend to be labour intensive per se and are able to generate more jobs for every unit of investment+ compared to their bigger counterparts.er cost of production+ l e a s t u p t o limited volumes.n a propensity of being able to adopt and internalize thetechnology being used by them. (roble&s In SME Financing % >espite its commendable contribution to the NationDs economy+ SM1 Sector does not getthe re-uired support from the concerned . h i c h i s a h a n d i c a p i n . h e r e volumes are not huge. (e) #ig$ capacit to innovate export% SM1s s/ill in innovation+ improvisation and reverse engineering are legendary. 0 h u s + a n y c o u n t r y + S M 1 s c a n b e f o u n d s p r e a d v i r t u a l l y r i g h t across+ even through some specific location s emerge as BclustersC.
er+ lighting and ventilation+and safety measures etc.Some of the major problems are briefly as follo.4 b e c o m i n g m o r e competitive in the National and 2nternational Mar/ets and . o r / m e n .ho e7ploitt h e m b y c o m p l e t i n g t h e m t o s e l l t h e i r p r o d u c t s a t v e r y l o . 0hese short comings have tended to endanger the health of . up .ho charges veryhigh rates of interest+ or else they borro. p r i c e .ledge and non-availability of suitabletechnology+ lo. 4redit to the SM1sector continues to be non-commensurate . f t e r t h e nationalization of %F major 2ndian <an/s in Auly+ %&G&+ t h e 4 o m m e r c i a l b a n / s . 0here are no-uantity discounts+ since they are purchased in small -uantities and hencecharged+ higher prices by suppliers.ith various agencies in solving regular activities and lac/ of interaction . e r e providing only a small proportion of SM1s financial re-uirements. materialsin bul/ in a competitive mar/et.ith its contribution to the total industrial output. materials are not satisfactory. c) (roduction proble& of SMEs% SM1 units suffer from inade-uate . 0hey fall into the clutches of money lender . (inancial .ith government agencies on various matters. . 0he -uantit y+ -uality andregularity of the supply of ra.s against the share of the village and SM1 at F"@ in the industrial output+ itsshare in total credit to the industrial sector is only about H"@.or/ space+ po.ea/ness stands in the .absence of ade-uate and timely ban/ing finance+ limited /no. >ifficulty is also e7perienced in procuring semi-manufactured materials. 0he small and medium industrialists are generally poor and there are nofacilities for cheap credit. from the dealers of their goods+ .sE a) Financial proble&s of SMEs% 0he financial problem of SM1s is the 8oot 4ause for all the other problems faced by theSM1 sector.ay of securing ra. b) 'a" Material proble& of SMEs% 0his difficulty is e7perienced in a very pronounced form. production capacity+ follo.hich needs to be ta/en up for immediate and proper redressal. SM1 sector faces a number of problems . .
Sic/ness is caused byt. SM1s cannot afford to spend lavishly for advertisement to promote their sales. serious problem . (rom among the various internaland e7ternal causes of sic/ness the important ones are bud management+high rate of . 0echnology up gradation and the fre-uent need to rene.doption of modern techni-ues is either disli/ed by the entrepreneurs is not feasible.5 a n d h a v e a d v e r s e l y a f f e c t e d t h e r a t e o f p r o d u c t i o n .0he entrepreneurial ability of promoters of cottage industries and SM1s arehandicapped by technical /no.s mar/eting is not properly organized+ thehelpless artisans are completely at the mercy of middle man.ith changing technology. .ing primitive methods of production. g) Sickness of SMEs% .o sets of factors+ 2nternal and e7ternal factors. ho. 2t causes damage to the gro. 0he in efficiency in management comes first among managerial problems. Many small units have fallen sic/ due to one problem or the other. Iage rates and service conditions of small industries are not attractive to s/illed labor. 0he SM1s have to face the competitions from largescale units in mar/eting their products. M a n y u n i t s a r e follo. e) Marketing proble& of SMEs% . f) Managerial proble& of SMEs% Small scale industries in our country have suffered from the lac/ of e n t r e p r e n e u r i a l ability to develop initiative and underta/e ris/s in the une7plored industrialfields.the e-uipment has emerged as a big problem. in the areas of production+ finance+ accounting and mar/eting management. 0he potential demand for their goods remains under developed. d))ec$nological proble& of SMEs% 0oday technology is changing at a very fast phase# it becomes difficult for SM1s to copeup .hich is hampering small and medium sector has been s i c / n e s s .th and stability of SM1s.
6 capital gearing+ inade-uacy of finance+ short of ra.o distinctive approaches to try to overcome the so-called SM1 finance gap. 6o.1=>* in . 0his might be done through an e7ternal party providing the collateral or guarantees re-uired. common aim or feature of the viability based approach is the provision of appropriate finance that is tailored to the cash flo.ith the business plan.ing <usinesses (S.overnance+ 1ntrepreneurship = >evelopment (. ?nfortunately+ such schemes are counter to basic free mar/et principles+ and they tend to be unsustainable. 0his has led to claims of an 9SM1 finance gap9 3 particularly in emerging economies. labor productivity etc. 0his is mainly in the form ofE • • • $ac/ of satisfactory business plans+ accounting and other information# 2nade-uate assets for use as security# and+ 2nsufficiently high levels of profitability+ gearing+ li-uidity+ stability+ and other businessfinancial performance criteria on the part of funding applicants.<s*. Since the viability based approach is concerned . 2n addition+ mar/ets may be characterized by deficient information (limiting the effectiveness of financial statement-based lending and credit scoring*. .or/ for . 0his often entails a detailed revie.or/shop hosted by 0he Net.ith insufficient collateral. 0hus+ the second approach has been to broaden the viability based approach. .t a . materials+ outdated plant and machinery+ lo.ever+ there are no evidence of any significant structural barriers to the supply of ban/ or private e-uity finance to suitable SM1 applicants on mutually satisfactory terms and conditions in <ritain. 0here have been at least t. and assistance . substantial portion of the SM1 sector may not have the security re-uired for conventional collateral based ban/ lending+ nor high enough returns to attract formal venture capitalists and other ris/ investors.ro. . 0he first has been to broaden the collateral based approach by encouraging ban/ lenders to finance SM1s . J%'K Gap .lthough the returns generated by this approach in less developed countries may not be attractive to venture capitalists+ they can be significantly better than conventional collateral .eneva in Auly !""'+ SM1s that fall into this category have been defined as Small .ith the business itself+ the aim has been to provide better general business development assistance to reduce ris/ and increase returns. 0he main obstacles to funding here appear to be on the demand rather than the supply side of the business finance mar/et. 0his sector is increasingly called the Meso-finance sector.s of the SM1.
hile others have been interested in developing it largely in order to generate better financialeconomic returns for shareholders+ investors+ employees+ and clients. <an/s have traditionally relied on a combination of documentary sources of information+ intervie.ing <usinesses. 2n !""'+ a group of financial service providers and other sta/eholders came together to form the (inance . . ne. The management of business lending 0he effective management of lending to SM1s can contribute significantly to the overall gro. (.th finance sta/eholders together+ .er ris/ than traditional venture capital+ this sector has been named the 9gro.ever+ in the last several years+ improved information and communications technology have made the process easier and cheaper.hilst at the same time being less ris/y than the typical venture capitalist business.*.S0 states that one of its objectives is to improve access to finance for SM1s by lin/ing sustainable trading relationships . 0hey have declared their target audience to be Small .ith the vie.s technology and information sharing continue to improve+ the approach could become significantly more costeffective and attractive to established financiers . avenue for diversification+ is available to investors.7 based lending 3 . Some investors have promoted this approach as a means of achieving .ider social benefits+ .hich ban/s assess and monitor business loans+ manage business financing ris/s+ and price their products 3 and ho.hen assessing comparatively small and straightfor. these methods might be further developed and improved.ro.N>1*+ has been created to bring the gro. .S0 is an association of financial service providers e7plicitly committed to improving access to finance for sustainable SM1sL defined as SM1s that are compliant .ith one or more of a host of gro.+ distinct asset class+ offering a ne.hich have been observed to reduce the ris/ profile of SM1s in traditionally high ris/ sectors.lliance for Sustainable 0rade ((.hat venture capital or microfinance associations do.s and visits+ and the personal /no. 0hus+ a ne. to evolve into an association serving the sector+ similar to . 6o.ing sustainability standards (such as organics+ fair trade+ forest ste.ever+ . Iith higher profitability than traditional SM1 finance and lo.th finance sector9. 0here has been considerable research and analysis into the methods by . 2n the past+ a significant obstacle to applying this approach in less developed countries has been getting the information re-uired to assess viability+ plus the costs of transferring and providing business development assistance. (.spen Net. J!K 0here has been particularly intensive scrutiny of the /inds of business financial information that ban/s use in ma/ing lending decisions+ and ho.ith sustainable production practicesLboth of .S0*. reliable that information actually is.ardship council etc.ard .or/ for >evelopment 1ntrepreneurs (. organisation+ .ith viability based approaches+ and to consultants providing business development assistance to SM1s in other+ more mainstream areas.ledge and e7pertise of managers in assessing and monitoring business loans. 6o.th and profitability of ban/s.
0his+ coupled . "Meso31i a %e".e"'%tio from the ori!i al Strate!> 7a(er? 4e9elo(me t 2ssita %e? 8e "er a " E ter(rise 4e9elo(me t 5m(a%t 2ssessme t) The &ase of #!a "a" (M>(*. www.org5p5.or!*feat'res*9ie+:feat're. httpE55ideas.' e%e. # $atio s E%o omi% &ommissio for E'ro(e (?N5141*. .. 4."3!e !). %". 8etrieved !""'-%%- Sanders+ 0hierry (!""G*. !""G.oecd.rchived on !""N-"&-!'.unece..(h(. 3.(h(.org5>ocuments5Mapers$in/s50ylersMaperonSM1s.htm. G. www.cit.85$8 E&/$/M5ES".s a result+ ban/s may no.. 9O14>-. ?N5141 Secretariat.html. Standardized computer-based assessment may also be more accurate and fairer than reliance on the personal judgments of local ban/ managers.# .orthy of subsidy9.+ri. htt()**earthtre "s. htt()**+++.s of businesses5o. 8etrieved !""N-"G-!'.ners*.repec.. References %.orldban/. htt()**+++. e9a. ?sing such techni-ues 3 and also centralizing or rationalizing business-ban/ing operations generally 3 can significantly reduce processing costs. More 4omplete 4onceptual (rame./0E /1 SM2003 2$4 ME45#M3S56E4 E$TE.M14 Keynote Maper on 8emoving <arriers to SM1 . 8etrieved !""'-")-H". 2.8 business credit applications+ ban/s may largely rely on standardized credit scoring techni-ues (-uantifying such things as the characteristics+ assets+ and cash flo. "T-E . httpE55rru. "7o9ert> .org. .ever+ business lending as a .unece.ES /1 EME.oecd.or!*i "'st*sme*forei! t. revised edition !""'. htt()**earthtre "s. 5.berry+ >ere/ (!""G*.ith the large size and inherently ris/y nature of many business loans+ tend to limit the scope and desirability of computerized credit scoring in assessment and monitoring.org5dataoecd5F5%G5HN'%'H!".ps5HN&).7. 7. 9.ccess to 2nternational Mar/ets9.+ri. Kamanyi+ Audy (!""H*.br. The Business Finance Market: A Survey+ 2ndustrial Systems 8esearch Mublications+ op.htm..or/ for SM1 (inance9. 8etrieved !""N-"G-!'. 6o. ite" 0yler <iggs. 8etrieved !""'-")-%&.. Iorld <an/ (?N5141*. 9.or!*feat'res*9ie+:feat're. &. .dapted fromE <erger+ . www.hole is substantially more diverse and comple7 than personal and residential mortgage lending.%om*!o9er a %e*!o9er a %e.1=>9. 8etrieved !""'-")-H". be able to offer more loans+ faster and in larger amounts+ and reduce previously high security re-uirements.org.5SES 5$ T-E 1#T#.pdf.+ page )N.pdf. The Business Finance Market: A Survey+ 2ndustrial Systems 8esearch Mublications+ Manchester ?K+ Hrd.theme<5=fi"<69 . "SMEs – Their role i forei! tra"e". . O14>. httpE55. Ne. theme<5=fi"<69. ?dell (!"")*.org.b/5. 8. 92s small beautiful and .
.rchived from the original on !""'-"G-!".N42. httpE55. htt()**+++. 18. 13.iisd.uide+ !""&9 The Management of Business Lending: A Survey+ 2S85.title<SME:fi a %e=ol"i"<465640560 9 8etrieved from 9htt()**e .oogle <oo/s+ !""!.S .e ter(rise3 im(a%t.N42N..org..org5. See Motts+ Aason (!""N* . %N. .org5site5c..shellfo' "atio . Stefan Hellmer. 14.(h(. OM02ONS (O8 SM.archive. 16..or!*+e@*20070928025317*htt()**+++.me '54<25=sme '54<25=@me '54<48= e+s54<222 . Shell (oundation. %).com5doc5HG"%&G!N5sme-financing Q (2N. httpE55.hu$I AeM8Kp65b.or!*i "eB.aspeninstitute. 8etrieved !""N-"G-!'.N42N.pdf The Management of Business Lending: A Survey+ 2S85.$$ .. 15 (re&its.02V1 M1.fastinternational..NS O( (2N.or!.N . 19.scribd.”Esisal Lemuel. "So%ial im(a%t mo"el E ter(rise Sol'tio s to 7o9ert>".or!*+*i "eB.eb5!""'"G!"%HHH)&5httpE55. 12. • 1<8> SM1 finance • • 2nnovative financing for sustainable small and medium enterprises in . 11.. DEPA !"E#!E School of Management+ <le/inge 2nstitute of 0echnology+ "aster‟s !$esis in %usiness A&ministrati'n.(h(.htm. External lin s • Small = Medium-Sized <usiness (inanceE .!)'N5. 8evie.frica Ma/ing (inance Ior/ for .NK (2N. 9. 8etrieved !""'-%%-!).. 9(.N> M1>2?M 1N018M82S1S (SM1S*E 1RM$O82N.9 htt()**+e@.eb..$018N..oogle <oo/s+ !""!+ page H&. NON-<.fricaE SM1 (inance = $easing .("f.N>19.spenPNet. 8etrieved !""N-"G-!'.+iki(e"ia.org5pdf5!""N5tradePpricePaltPtrade.'k*("f*Aama >i. 90he 2(4 SM1 <an/ing Kno.ledge .$ 2NS020?02ONS ...or/PofP>evelopmentP1ntrepreneurs.ar%hi9e. 6offman+ Kurt# 4hris Iest+ Karen Iestley+ Sharna Aarvis (March !"")*. 8etrieved !"%"-"%-"%.S09.lternative trade initiatives and income predictabilityE 0heory and evidence from the coffee sector httpE55.F!"F"HN5/.
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