The over-riding reason for anyone to think of establishing a SSI unit can be summarized in one word - OPPORTUNITY. If one can see an opportunity to provide a product or service in a manner to generate sufficient surplus, then one way is to start up a SSI unit. This is all the more true if one believes in the maxim, "Small is Beautiful". Opportunities emerge out of ideas that one comes across by thinking about lives of friends and neighbors. This can generate ideas about products and services that can make things easier, and improve quality of life of people.
It is well known that small business plays a substantial role in our overall economy. As of 2002-2003 there were nearly 3.6 million SSI’s providing employments to around 20million people. The Small Business ministry’s definition of a small-scale industry-- An industrial undertaking in which the investment in fixed assets in plant and machinery whether held on ownership terms on lease or on hire purchase does not exceed Rs 10 million. The SSI sector has tremendous potential for generating sustainable employment at comparatively low costs and this potential must be exploited if the economy has to maintain a sustained growth in employment.
Small businesses can seek funding from numerous sources. Central and local governments offer various financing vehicles for new and emerging businesses, just as banking; public-private partnerships provide capital to firms that qualify their funding criteria. For the entrepreneur seeking financial support for a venture, the most important thing to know is which of these funding organization is the most appropriate to approach, given the nature of the request, the stage of the business, and most important, the expectations and appetite for risk of the capital provider.
Start-up Funding and Small Companies--Micro enterprise Lenders
New and small ventures often require sums that are, relatively speaking, quite modest, but are, nonetheless, critical to getting the business established. No SSI unit can take off without monetary support. This need for finance can be classified into following types:
Ø Long and medium term loans
Ø Short term or working capital requirements
Ø Risk Capital
Ø Seed Capital/Marginal Money
Ø Bridge loans
Financial assistance in India for SSI units is available from a variety of institutions. The important ones are
Ø SIDBI: Small Industries Development Bank of India (refinance and direct lending)
Ø SFCs: State level Financial Corporation e.g. Delhi Financial Corporation, KSFC, MSFC
Ø NSIC: National Small Industry Corporation.
Ø Small Industry Development Corporations of various states.
Ø DIC: District Industry Centre.
Ø Industrial Finance Corporation of India
State Financial Corporations, SIDBI and State Industrial Development Corporations provide long and medium 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. Term loans are secured against mortgage of assets such as land, building, machines, equipment and other stocks. The short-term loans are required for working capital requirements, which fund the purchase of raw material and consumable, payment of wages and other immediate manufacturing and administrative expenses.
There is, however, a Single Widow Scheme, for SSI units. Under the scheme, one agency, either the bank or the financial institution, funds both the term loan and working capital requirements. This scheme applies to all SSI projects with project cost up to Rs. 5 million. The working capital loan is generally secured against
Ø Pledging of stocks, raw materials and finished goods
Ø Advances against work-in-progress (WIP)
Ø Advance against bills
Training and technical assistance in business administration are as important as financing to the viability of SSI’s. SSI’s often need guidance on the principles of operating a business, such as developing a business plan, implementing accounting and financial-reporting systems, and creating marketing strategies. These essential elements of business management are vital to the growth of an enterprise because they demonstrate a firm's organizational capacity and position it for future development and financing opportunities. As a result, SSI lenders typically offer extensive training and individual counseling in conjunction with their credit programs. With the mission to serve and promote SSI’s, these organizations have the expertise and the capacity to connect very small businesses with the resources they need. The technical assistance that these programs offer is consistent with the organization's objectives and tolerance for the level of business and credit risk that is inherent in newer, undercapitalized firms.
Patient Capital--Venture Capitalists and Angel Investors
Depending on the entrepreneur and the business, another source of funding for new and developing businesses may be equity partners, often known as venture capitalists and angel investors. This type of financing represents the opposite end of the funding spectrum from SSI lenders and is provided by professionals who invest alongside management in young, rapidly growing companies that show the potential for significant growth. With an ownership interest, these investors have a stake in the success of the business, and with the acceptance of a higher level of risk come the expectation of a higher return. Not only do they provide capital, they also are generally active in the management of the business, participating in management decisions such as the development of new products or services and business strategies. With extensive experience, these investors bring considerable business expertise to an enterprise; they are valuable resources in managing its expansion and have a long-term orientation when evaluating a firm's potential. However, despite this longer-term focus, these investors also have a definite exit strategy. They expect, at some point, to sell their share of the business.
Equity partners, be they corporations, foundations, pension funds, government, or individuals, are a source of patient capital that can be critical to the growth of a business. Equity provides a buffer during cyclical or periodic downturns in a firm's cash flow and serves as leverage for other types of financing, such as bank credit. Venture capital funds often specialize in providing capital to businesses that fit their investment profile, as defined by a point in the business life cycle, by an industry, or by a mission. Equity investment is available to firms that offer the promise of creating jobs and improving the economic prospects of lower-income urban and rural areas.
Entrepreneurs seeking equity funding to support their firms' growth and development should identify investors whose investment objectives are consistent with their businesses' needs, characteristics, and role in the local economy. Some of the venture capitalist firms in India are listed below
ü ICICI Venture Funds Management Company
ü IFCI Venture Capital Funds Ltd.
ü SIDBI Venture Capital Limited
ü IL & FS Group
ü Gujraj Venture Finance Limited
Business Operations Financing--Bank Creditors
When considering bank financing, it is helpful to first understand how banks as lenders differ from investors. Unlike the venture capital business, banks are lending their depositors money and therefore operate on a much lower risk tolerance. Because bankers have a very low tolerance for error, they conduct careful analyses of a business's financial strength and ability to service the debt from its operations and cash flow. Banks can lend money to either purchase business assets, or to provide ongoing funding for business operations. In either case, banks carefully analyze the capacity of the business to generate the funds to repay the loan. Therefore, typically, banks rely on at least two years of financial statements and the business's track record of meeting its obligations to evaluate credit worthiness and debt-service capability. Bankers also recognize the need to provide financial planning assistance and specific financial management guidance but do not assume the same day-to-day management involvement as would a venture capital investor.
For loans from commercial banks a formal application needs to be made. The details of documentation that need to be provided with the loan applications are shown here.
Ø Documentation for Loan Application
Ø Balance Sheet and Profit Loss Statement for last three consecutive years of firms owned by promoters
Ø Income Tax Assessment Certificates of Partners/Directors
Ø Proof of Possession of Land/Building
Ø Partnership deed/Memorandum and Article of Associations of Company
Ø Project Report
Ø Budgetary Quotations of Plant and Machinery
A sanction or rejection letter is issued by bank after its assessment of the application. After receiving a sanction letter applicant 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.
Small businesses play a substantial role in the economy of the country. As each of you pursues dreams of business ownership, you also contribute to the economic health of your community and your country.