3/15/23, 3:35 PM Guide to securing funds for SMBs (Small & Medium-sized Businesses)

CSL Finance Ltd Aug 30, 2022 3 min read

Guide to securing funds for SMBs (Small &

Medium-sized Businesses)
Updated: Aug 31, 2022

Intro to status-quo:
Small and Medium-sized businesses have a unique and unorganized ecosystem compared to the
larger corporations in India. And hence there is a lot of information asymmetry, especially
financial information like funding and government aid are usually lesser known amongst SMB
entrepreneurs. This lack of financial awareness can put an SMB at risk of failure.

Why is this knowledge imp?

The lending gap in the MSME sector is roughly about 20-25 trillion INR as of 2019 according to the
UK Sinha committee and this indicates the competitiveness of the space. Access to capital is a
key challenge for entrepreneurs at this scale due to various restrictions and due diligence needed
for different modes of funding. Having the knowledge about the right kind of funding and how to
access it at different stages of the life-cycle (start-up stage, survival stage, growth stage, and
sustenance stage) also becomes important.

Types of funding for SMBs:

Here are some of the sources of funding utilized by many SMB entrepreneurs, ranked from the
easiest to least easy to obtain based on the need for collateral:

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1. Personal Savings: This is one of the initial sources resorted to by most business owners in order
to avoid taking debt. But there are two issues with this – (a) the level of personal savings and (b)
how much of this savings you are willing to risk.
Usually, it’s a better idea to opt for other sources of funding in order to avoid putting personal
funds at risk.

2. Family & Friends: Although a little tricky given the subjective nature of the relationships,
obtaining credit from friends and family is an almost collateral-free way for funding. Sometimes it
might involve an equity exchange as well so it’s important to be cognizant of the potential risk
not just financially but also at a relationship level.

3. Crowd Funding: Obtaining funding from multiple smaller lenders through various
crowdsourcing platforms works well for an innovative product. This might or might not involve
returning the capital depending on the platform used. This mode does not require any collateral
but needs immense trust in the product in the community.

4. Non-Banking Financial Institutions (NBFCs): Since they are not as regulated as the banks, the
eligibility criteria are more relaxed leading to easier loan approvals. However, they do charge
higher interest rates than those banks based on the credit score and risk profile of the borrower.

5. Government Grants & Schemes: Pradhan Mantri Mudra Yojana is a scheme for offering finance
to MSMEs and has different funding amounts starting from Rs. 50,000 to Rs. 10 Lakhs depending
on the stage of the company. These loans are easier to obtain since they don’t require any
collateral for security. There are also others like Credit Guarantee fund Trust for MSEs (CGTMSE)
and Emergency Credit Line Guarantee Scheme (ECLGS).

6. Business loans from banks:

a. Public and private sector banks – both these sets of banks offer business loans against collateral
and strong credit history documentation. This slightly reduces the interest burden on
entrepreneurs who maintain a good credit score.

b. Cooperative banks – given the flexible payment cycles and collateral needs, these are more
preferred for smaller amounts of business loans

7. Angel Investors – Networking is a great way to find these wealthy individuals/families who are
keen on investing in growing businesses, and this might also include losing out on equity in the
business in some cases

8. Venture Capital firms – They are more suitable for medium-sized businesses looking for growth
with a valuation target of 100 M$ within 5 years. However, there are some exceptions to this based
on philanthropic endeavors so one should keep an eye open.

Conclusion:
It is imperative for the SMB entrepreneur to do his/her research and set financial goals upfront in-
order to choose the right source of capital. Choosing an unsuitable type of credit line can lead to

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unwanted outcomes such as disagreements between the lender and business owner, waste of
time and resources, the shift of control, and other negative consequences.
We at CSL finance help small and medium business enterprises with various funding needs. Do
reach out for expert advice so that you can take the right decision at the right time.

Sources:
· https://www.paisabazaar.com/business-loan/small-businesses-can-use-business-funding-
raising-capital/
· Alternative lending options than banks ( not India) -
https://www.businessnewsdaily.com/1733-small-business-financing-options-.html
· Bank loans and process - https://www.creditmantri.com/small-and-medium-sized-
enterprises-loans/
· Global MSME work done by world bank on finance gap -
https://www.worldbank.org/en/topic/smefinance
· https://www.ifc.org/wps/wcm/connect/03522e90-a13d-4a02-87cd-9ee9a297b311/121264-WP-
PUBLIC-MSMEReportFINAL.pdf?MOD=AJPERES&CVID=m5SwAQA

#cslfinance #smbfinance #smb #msme #realestate #retaillending #corporateloan

#personalloan

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