What background work to do before you seek finance?

By: smartdev0 comments

Over the past ten years I have interacted with thousands of SMEs and spoken to them about their issues. Almost every entrepreneur lists raising finance as one of his top problem areas. The Govt. of India has over the past several years brought in several schemes and regulations to make finance available to SMEs. Yet, why do entrepreneurs list it as a major problem? Perhaps there is a gap between the good intent of the Govt. and the implementation. But also perhaps, the SMEs can try and do something about it.

During the course of my discussions with SMEs, I find that in several deserving cases the businesses do not get adequate funding or get wrong type of funding from financiers, largely due to the entrepreneur’s inability to plead his/her case effectively. Some of the key shortcomings are as follows:

  • Not having a proper business plan: In several cases the entrepreneur gets into a business based on hearsay or by looking at someone else’s success, without going into details such as the market demand & supply situation, his own capability, marketing arrangements and so on. If these issues are not thought through, convincing banks/NBFCs to give a loan becomes difficult.
  • Not being able to prepare a proper project report – many entrepreneurs fail to put their ideas effectively into a document that becomes the basis for financiers to assess viability of the project. Taking professional help can overcome this easily. Having a mentor or a sounding board who can point out loopholes in the plan and anticipate questions from the financiers would make the entire process easier.
  • Not thinking about a disaster situation and preparing a contingency plan – Things will not go right always. Financiers would probe you on whether you have planned for downtrends and thought about what to do in such a situation to ensure you can service your loan liabilities.
  • Not planning one’s own capital contribution to the business – Financiers would always try to assess what is the entrepreneur’s skin in the game in the business. They look for signals on whether the promoter is willing to put in his own capital to the maximum extent possible. If they feel that the promoter is holding back and not wanting to contribute his fair share, their own confidence in lending to the business will go down. Own equity planning – how much funds promoter will put in, source of such funds, what part of his personal net worth is being invested etc. would be critical factors.
  • Knowledge of various Govt. schemes – capital subsidy, tax benefits, easy access to markets etc. would be necessary to prepare a well drafted plan.

Paying attention to some of the aforesaid simple things will make the process of obtaining finance for an SME a lot easier. At the end of the day, lenders make money by lending and not rejecting loan proposals, but it is up to the SME owner to help them take the right decision.

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