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A Guide on Starting MSME in India - Part V

Updated on May 14, 2010

Finding the Finance

Finance is the life blood of an enterprise. Project implementation requires land and building, staff, raw materials, machinery, etc. Finance is required to assemble these inputs. A majority of the business firms fail due to lack of funds or faulty financial planning.

The need for finance can be classified into following types:

- Long and medium term loans

- Short term or working capital requirements

- Risk Capital

- Seed Capital/Marginal Money

- Bridge loans

The sources of funds may be broadly classified as follows:

Internal (Ownership capital)     &   External (Borrowed capital)

Equity shares, Preference shares, Reinvestment of earnings & Personal loans are examples of internal finance. Debentures,Long term loans, Public deposits, Bank credit, Hire purchase and leasing, Margin money, & Seed margin money are external finances.

Financial assistance in India for MSME units is available from a variety of institutions. The important ones are:

  1. Commercial/Regional Rural/Co-operative Banks.
  2. SIDBI: Small Industries Development Bank of India (refinance and direct lending)
  3. Industrial Finance Corporation of India (IFCI)
  4. Export Import Bank of India (EXIM)
  5. National Small Industries Corporation (NSIC)
  6. Industrial Development Bank of India (IDBI)
  7. National Bank for Agriculture and Rural Development (NABARD)
  8. SFCs/SIDCs: State Financial Corporations/State Industrial Development Corporations.

Long and medium term loans are provided by SFCs, SIDBI and SIDCs. Banks also finance term loans. This type of financing is needed to fund purchase of land, construction of factory building/shed and for purchase of machinery and equipment. The short-term loans are required for working capital requirements, which fund the purchase of raw materials and consumables, payment of wages and other immediate manufacturing and administrative expenses. Such loans are generally available from commercial banks. The commercial banks also sanction composite loan comprising of working capital and term loan up to a loan limit of Rs.1 crore. In India, Government provides incentives as grants and subsidies. These fund sources should also be taken into consideration.

List of Incentives or Subsidies offered by Central and State Governments

  1. Interest free loans
  2. Export/import subsidies
  3. Subsidy for R& D
  4. Subsidy for power generators
  5. Transport subsidy
  6. Exemption from property tax
  7. Exemption from income tax
  8. Incentives to women entrepreneurs
  9. Subsidies to artisans and traditional industries
  10. Incentives to NRIs
  11. Subsidy for industrial housing
  12. Price preference to MSMEs
  13. Allotment of developed or constructed sheds or building
  14. Allotment of subsidized raw materials

Current Scenario

An interesting trend seen is India’s MSMEs are no longer depending on banks for funding. Now leading investment houses and private equity, or PE funds are cashing in on the funding needs of the MSMEs. Promoters owned MSMEs too are now willing to share their equities and raise funds rather than depending solely on banks for their funding needs. Apart from providing capital investment, PE funds also bring with them various other expertise to the company with regard to corporate governance, managerial assistance and cost effective strategies. In today’s environment there are other choices apart from commercial banks and Government owned financial institutions. These options include venture capital funds and non-government finance companies.

Small Business Investment Companies (SBIC) or Specialized Small Business Investment Companies (S-SBIC), Angel investors, Investment clubs and companies, and Strategic investors are some of the other sources of finding funds for a new or prospective business.

How to avail Financial schemes/loans?

For loans from financial institutions and commercial banks a formal application needs to be made. The details of documentation that need to be provided with the loan application is shown here.

- Documentation for Loan Application

- Balance Sheet and Profit Loss Statement for last three consecutive years of firms owned by promoters

- Income Tax Assessment Certificates of Partners/Directors

- Proof of Possession of Land/Building

- Architects estimate for construction cost

- Partnership deed/Memorandum and Articles of Associations of Company.

- Project Report

- Budgetary Quotations of Plant and Machinery

A sanction or rejection letter is issued by bank after its assessment of the application. After receiving sanction letter applicants need to indicate in writing their acceptance of terms and conditions laid down by FI/ Banks.

Subsequent loan is disbursed according to the phased implementation of the project. In today's environment there are other choices apart from commercial banks and Government owned financial institutions. These options include venture capital funds and non-government finance companies.

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