The SME World

Every business begins small, grows gradually, striving to transform itself into that big corporation through all its effort and perseverance and some day gets there. Not all succeed, but that does not in any way mean that the remaining fail. Small and medium enterprises are in fact the lifeblood of any economy – big or small, developed or developing. It is the small and medium enterprises which in fact drive a major part of the economy. Here are some numbers which will help put into perspective the importance of SMEs. According to reports, SMEs account for as much as 50 per cent of the GDP in developed economies. World Bank data suggests that within the EU, SMEs collectively employ 75 per cent of the work force and create as much as 85 per cent of new jobs.

The Indian side of the story is equally interesting around 40 per cent of the country’s domestic production is taken care of by the small and medium enterprises. 50 per cent of the Indian exports happen through SMEs and interestingly they account for as much as 45 per cent of the industrial production. The contribution of these organizations to the GDP of the nation is a real eye opener. According to reports, as much as 35 to 40 per cent of the GDP is contributed by the SMEs and they account for more than 90 per cent of the all industrial enterprises in the country.

The Changing Face Of SMEs

From small unorganized and striving to succeed stories SMEs have gone through a sea change with the changing economic environment. Even in the most challenging business environments, these enterprise have stuck to their core and managed to tide over the difficulties. One of the most important contributors to their success and sustenance has been their embracement of technology. The highly educated and technocratic entrepreneurs of today have developed ways and means of their own to meet the challenges that come their way.

Meeting the Challenges 

The People Problem: This is probably the worst of the problems for the SMEs. Finding, training and then retaining talent at work is the most difficult task for these institutions. Many find it rather unfashionable and below standards to work for SMEs. However lack of experience brings them to these institutions and once the training and requisite experience to jump into bigger wells is assumed the jump becomes rather obvious and easy. This puts tremendous pressure on the SMEs who have to keep on training and retraining people only to loose them to the bigger world.

Here is an extract from a report which sums up the above problem very nicely. According the report, it is not easy for SMEs in both developed and emerging markets to hire and retain people with the right skills. In developed markets, 77 per cent describe this as an obstacle, with as many as 83 per cent in Japan signaling this as a barrier. In emerging economies the figure is 79 per cent, reaching 84 per cent in Brazil and China. Meanwhile, in developed countries, 42 per cent of small business leaders say they have more problems finding the right personnel than three years ago; among SME managers in emerging markets, the figure is higher, at 57 per cent. (Source: Report by Priyadarshi Mohapatra in www.smeworld.com)

The Financing Problem: Among the most important of issues that SMEs face is that of financing. Commencing business by drawing from their own resources, entrepreneurs have to bulk of the time depend on the internal accruals or informal sources of funding. The banking sector in India has been trying to bridge that gap by bringing SME funding into priority sector lending. However that too is still at a nascent stage. This has brought policymakers and regulators to think about and implement the more easier ways for SMEs to tide over their funding requirements. The most innovative and most recent initiative was to bring them to the capital markets. The SME platform launched by the BSE is an example in itself. Here are the various options at the disposal of the SMEs for their funding needs.

Equity

There is now growing trend in institutionalisation of this kind of funding sources. One can raise funds via angel investors or by HNIs, individual HNIs or other angel groups present in the market. There are various local HNIs forming angel funding groups to fund local SMEs. Up in the ladder, there are number of Venture Capital funds along with Private Equity funds which funds SMEs with considerable sizable fund requirements. Further, joint ventures and collaborations with other peers or foreign players are the other ways of funding for indian SMEs. 

Debt

SME lending being in priority sector in India, there are number of financers such as banks, NBFCs, co-operative banks offering various debt options depending upon stage and nature of SME business. Additionally, there are various government schemes such as collateral free loan upto Rs 1 crore ore SIDBI funded SME loans etc. further, the working capital funding for SMEs are available through bill discounting, traditional bank overdraft, working capital term loan, securitisation of receivables, factoring finance, commercial paper issuance by banks for sound rating SMEs, etc. Further, there are pre- hipment and post-shipment credits available for export oriented SMEs

Mezzanine Debt Financing

There are some institutions offering complex funding products with a mix of equity and debt. Few example of such kind of funding are convertible debentures, preference stocks with convertible options, senior debt converting to equities, etc.

Subsidies

There are few businesses for which Indian government or other government agencies offers funds to upcoming and technologically proven sectors to take advantages growth and benefits prevailing in these sectors. For example, various solar power, wind power or biogas power sector companies enjoys financial subsidies from these associations. 

The Regulation Problem

Among the lesser difficult problems that the SMEs encounter is that of regulation. The unorganised sector where many SMEs function is troubled by loose regulation. This is where a good part of the resources get drained out. If addressed, it would go a long way in protecting the interests of the SMEs and lead to a sustained development and progress of these institutions.

The Road Ahead

The government has been making sustained efforts at developing the SME sector in India. There is a greater need for the SMEs themselves to give in to proper regulation and adopt to the changing scenario. Not that SMEs aren’t really prepared for it. There is a long way to go yet.