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A redeemable idea and expertise don’t guarantee a successful show for a pinched entrepreneur. Money is indispensable, and equally inaccessible for the smaller players!

A majestic Rolls Royce could well be reduced to a fancy box of coloured tin without fuel. And so can be a potential entrepreneur to just another dreamer without moolah.


While an economically-viable idea is a pre-requisite for a business, availability of adequate fund is a pre-requisite to such an idea.

Such is the importance of funds. But incidentally, its availability is inversely proportionate to its importance, especially, for small and medium enterprises (SMEs).

Despite, being the backbone of an economy and the key source of economic growth, dynamism and flexibility in a country, SMEs are subject to scepticism of lenders. This is partly because such enterprises involve high risk element given their volatile nature in comparison to larger and stable firms.

Altering Perception
Of late, close to two decades post-liberalisation of the economy, a slight shift in the perception has occurred. “Today, all the banks are focusing on MSMEs,” says Vara Prasad, General Manager (Mid Corporate & MSME Dept.), Union Bank of India.

Parag Patki, CEO, SMERA, credit rating agency for SMEs, says, “Commercial bank credit to MSEs, as a percentage of net bank credit, had declined sharply since the late 1990s. From 14.3 per cent in 1997, it had come down to 6.5 per cent in 2007.” However, signalling a change he further adds that, “A slight improvement has been noticed in the year 2008-09 with the percentage surging to 9.9 per cent; which possibly could be due to change in definition of MSEs in the year 2006.” As per the MSMED Act, 2006, investment ceiling has been increased to `5 crores (for manufacturing units) and `2 crores (for service units) from the level of `1 crore prior to this act.

“Today, all the banks are focusing on MSMEs”
— Vara Prasad,
General Manager, Union Bank

The percentage may have risen but the figures remain fairly insignificant, reinforcing the persistence of funding as an imposing challenge for SMEs.

The smaller players, who choose to stick to the organised credit market, meet with incessant obstacles in various stages of funding.

Initial Stage
An entrepreneur to meet the funding requirements at the initial stages of his business generally approaches a bank. But gets stuck at the very threshold for he knows not how to work out a project plan, which is the first step to approach a bank.
A project plan, a detailed report on various aspects of a existing or new business, could make or mar the loan prospects of an enterprise. So “it is important to have commercially, technically and economically viable idea in the first place,” emphasises S C Kalia, Executive Director, Union Bank of India.

“We look at various aspects such as—the current ratio, debt-equity ratio, marketing capability, tie-ups, availability of raw material, etc. while assessing a business project,” states Kalia.

“It is important to have commercially, technically and economically viable idea in the first place”
— S C Kalia
Executive Director, Union Bank

“The banks just look at figures,” says nonchalantly Nitin Patil, Director, Logix Info Security. While many don’t have any to show, a good lot are unable to show qualifying figures as they maintain their books at deflated levels to avoid taxes. “We extend loan up to 20 per cent, in special cases a maximum of up to 30 per cent, of the projected turn-over. However, if the books show low figures while their requirement of loan is high, there isn’t much that we can do,” says T R Bajalia, Executive Director, IDBI Bank Ltd.

Among other challenges in securing a bank loan, collateral is a crucial one. As per rule, banks can’t ask for collateral for loans up to Rs 10 lakh, but many still do. Bajalia says, “We have directed our staff not to ask for collateral up to `100 lakh.” According to him it is important that the mind-set of banks, especially the ones set in rural areas, is changed as they are still reluctant to sanction loans without sufficient collateral.

Interim Stage
While in the initial stages entrepreneurs manage their fund requirements through friends, family or banks, for the next round of money they mostly chase angel investors. Somewhere between banks and Venture Capital (VC) lie angel investors; they provide the much needed credit to entrepreneurs when banks are no-more an option given their limited exposure and VCs choose not to invest in low-scale operating enterprises.

“Convincing an angel investor is the biggest challenge for an entrepreneur”
— Pradeep Gupta
Co-founder, Indian Angels Network

Talking about the challenges faced by entrepreneurs Chairman and Managing Director of CyberMedia Group and co-founder of Indian Angels Network Pradeep Gupta says, “Convincing an angel investor is the biggest challenge for an entrepreneur.” Angels looks at scalability of the business, quality of its management team and its differentiating factor.

He further adds, “For angels to invest, a business has to be a differentiator.” A plain vanilla business is unlikely to be funded by angels as they take high risks and therefore, expect high rewards. Angels only pick those businesses where preliminary validation of the concept has occurred or where a few customers have signed-on.

Take-off Stage
It is in this stage, when businesses have high credit requirements (beyond `10-20 crores), entrepreneurs approach the VCs. They are high risk investors who are interested in companies with high growth potential.
However, in accepting the risks, they demand a higher return on their investment and the expertise lent by them in promoting the business.

“VCs demand an exorbitant 30 to 50 per cent shares depending on one’s strength,” says J N Agarwal, Managing Director, Jaipan Industries.

While considering for investment, “The two crucial elements VCs look at are— the market size and the quality of the team,” says Harish Gandhi, Executive Director, Canaan India. Scalability of a business majorly depends on the market size of the industry and the maturity of the market. While the actual growth depends on the team that executes and delivers.
“Traction and differentiation are two deciding factors,” says Mohanjit Jolly, Managing Director, Draper Fisher Jurvetson India. Any validation, from customers, partners and even employees gives comfort to the investors.

“We look for funding and VCs look for exit option”
— Atul Tibrewala
CEO, Cartridge Junction

However, the most important thing they lookout for is the exit option for their investment, either through IPO or merger and acquisition.

“I approached three VCs and all asked the same question—What is the exit option?” says Atul Tibrewala, CEO, Catridge Junction who finally gave up and decided against going for VC funding. He grudgingly complains that, “We look for funding and they look for exit option.”

Quick Analysis
What do bankslook for?
• Sound Project Plan
• Collateral
• Credit Rating
What do Angel Investors look for?
• Scalability
• Quality of Management
• Differentiating Factor
• Traction
• Exit Option
What do VCs look for?
• Scalability or Market Potential
• Quality of Management
• Market Size
• Technology/Differentiation
• Traction
• Exit Opportunity

In response to entrepreneurs’ disapproval against VCs’ prioritisation of exit option, Gandhi opines, “Ultimately, exit has to happen—why else will a VC invest! It invests to get great return.” However, “the onus of assessing the time of exit or the method is not on the entrepreneur necessarily. The fund assesses the space of exit, likely valuation, type of exit, etc.” says he.

The challenges involved in accessing VC funding, however, are not limited to conventional challenges. With the surge in the number of potential deals with VCs, it is becoming increasingly difficult for entrepreneurs to rise above the noise and get noticed. In fact, with the VCs doing more of later-stage investments, the start-ups are getting pushed into a prototypical catch-22. “They need capital to make progress; and they need to show progress to get capital,” says Jolly.

Challenge-Mitigating Agents
While accessing funds remains a formidable challenge for SMEs till date, credit rating certainly mitigates their predicament. The agencies rate the enterprises on—industry risk, business risk, management risk, financial risk and project assessment risk. Making it easier for the lender to understand the current position and potential of the unit. “Credit rating helps MSMEs save time, effort and money while applying for bank credit. It also simplifies and quickens the process of lending to MSMEs,” says Patki. He further adds that, “Lesser insistence on collateral, release of collaterals taken earlier, quick disbursals are some of the other tangible benefits of credit rating.”

Credit Guarantee Fund Trust for Micro and Small Enterprises is another help-agent for struggling entrepreneurs. The credit guarantee scheme by CGTMSE provides guarantee cover to banks on loans to micro and small enterprises (MSEs) up to Rs100 lakh.

The scheme has been instrumental in gradually extenuating collateral as a potential challenge for those seeking bank loan. “Banks are moving away from the mind-set of collateralised lending,” says U R Tata, CEO, CGTMSE. And it is evident from that fact that the organisation has enabled 4,05,000 micro and small units so far to secure collateral free loans under this scheme.

Stay Fit to Fight
There’s a total of 2.61 crore MSMEs in the country, as per the Quick results of 4th All India Census of MSMEs (2006-07), and all are struggling to survive.

But as the Darwinian theory goes, it is the survival of only the fittest; so as long as an enterprise has the potential, competitive advantage, best strategies, strong management team, upgraded technology and most importantly the zest to be the best, lenders will give the money!

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