Introduction
SMEs, or
Small and Medium Enterprises, are businesses that have less than 500 employees.
They make up 99.9% of all companies in India and contribute more than half of
the country's gross domestic product (GDP). However, despite their importance
to the Indian economy, SMEs face numerous challenges when it comes to funding
their operations. In this article we'll go over some financing options
available for small businesses in India - whether they're setting up a new
company or expanding their existing one - so you can choose which financial
strategy works best for you!
What are SMEs?
Small and
medium-sized enterprises (SMEs) are defined by their size, not by their
industry. These privately owned businesses have annual revenues of between €1
million and €50 million. For example, a large enterprise might be in the
manufacturing sector and employ hundreds of people; a small business could be
in retail, with only a few employees on payroll. The main point is that SME is not an industry-specific term: it encompasses
any private enterprise that isn't part of a larger corporation or government
agency.
Traditional options for SME Finance
Traditional
financing options for SMEs include:
- Accounts Receivable
Financing
- Supply Chain Financing
- Reverse Factoring
- Invoice Financing
Accounts Receivable Financing
Accounts receivable financing is a type of asset-based lending
that involves a business selling its accounts receivable to a lender. The
lender makes an upfront payment to the business owner, and then receives
payments from the customers whose invoices have been sold. The sales price is
usually determined by factoring in the dollar value of each invoice, plus some
extra money for administrative fees and profit margin.
The
business owner continues collecting on the debt from customers and repays their
loan over time, paying interest monthly or quarterly at an agreed-upon rate.
Supply Chain Financing
Supply
chain financing is a type of capital financing that involves the funding,
arranging and managing of cash flow for suppliers to a company. Supply chain financing is often referred to as “supply
chain financing” or “KPO” (key performance obligation).
The main
aim of supply chain finance is to help companies reduce their working capital
requirements by using third-party providers to provide loans against their receivables.
It
differs from trade finance in that it does not involve international payments
and has more flexibility around who can claim on the funds, but this type of
finance does require good creditworthiness from both parties involved -
supplier and customer - due to the high risks associated with non-payment.
Supply
chain finance providers include banks, non-bank lenders and leasing companies.
Reverse Factoring
Reverse Factoring is a form of factoring that
provides cash advances to businesses on their accounts receivable. This type of
financing solution has become increasingly popular as SMEs struggle to obtain
traditional bank financing and face a challenging business environment.
Invoice Financing
Invoice financing is a quick and easy way to
borrow money from your outstanding invoices. It’s a flexible, short-term
solution that can be used to bridge cash flow gaps or fund growth.
Unlike
traditional bank loans, invoice financing isn't based on your credit history or
business performance but instead allows you to use the money owed by your
customers as collateral for the loan. You receive funds immediately upon
receipt of an invoice and only have to repay the principal amount once the
customer pays their bill—no matter how long it takes them!
Conclusion
Financing
options for small and medium-sized enterprises are varied, and can help you get
the funding you need. With so many options available to you as an SME owner, it’s important that you
know what each one entails before making a decision about which type of
financing will work best for your business.
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