SME Financing: Trends To Keep an Eye On Small and medium-sized businesses (SMEs) constitute the backbone of the Indian economy, making a considerable contribution to job creation and economic expansion. The demand for accessible and affordable financing solutions for SMEs has increased as a result of the government's emphasis on advancing the industry through programmes like Make in India, Digital India, and Startup India

The future of SME finance is a crucial topic that businesses need to be aware of. Small and medium-sized enterprises may not be able to grow to their full potential without access to funding, which is crucial for economic expansion and job creation.

In this article, we'll look at current SME finance trends and provide sage advice on how businesses might take advantage of them.

Online Financing

Digital finance, a significant trend in SME financing, has many advantages. Peer-to-peer lending, crowdfunding, mobile banking, and online lending platforms are examples of aspects of digital finance. Since they provide businesses with a quicker and more practical way to obtain finance, these platforms are becoming more and more popular. As opposed to traditional banks, digital finance providers can approve loans rapidly and typically have softer lending standards.

According to CA Kresha Gupta, Founder and Fund Manager of Chanakya Fund Trust, which recently launched a INR 100 crore sector-agnostic SME-focused fund with a green shoe option of another INR 100 crore, "there are so many businesses in the country with some amazing entrepreneurs that have started exploring fundraising opportunities to keep the business viable."

A Category II Alternative Investment Fund registered with SEBI, Chanakya Opportunities Fund I would invest in successful SME businesses with promising prospects in unorganised industries. The corpus will be used to invest about 51% in startup manufacturing, consumer products, and technology SME businesses that are not publicly traded. With a ticket size ranging from INR 2 crore to INR 10 crore per company, it intends to invest in around 25 enterprises.

"On the SME exchange, scarcely 30 companies issued initial public offerings five years ago. By the year 2023, we will have already witnessed the listing of around 45 corporations. The combined market capitalization of the companies listed on both markets is currently around INR 45,000 crore, and all of these modest businesses have a possibility to grow into tomorrow's blue chip corporations. We intend to establish both these small-cap enterprises and blue-chip corporations through the Chanakya Fund Trust in the future," Gupta continues.

For SMEs looking for equity for their expansion capital requirements, the Mastermind JPIN SME expansion fund, a partnership between JPIN and business consultancy firm Mastermind Financial Services Pvt Ltd, can also be helpful. The fund invests between INR 5-20 crore out of its INR 150 crore corpus, a Category-1 AIF registered with SEBI, and it is sector agnostic.

"In the current complex business environment, SMEs in India need to reorient the funding mix of their businesses by expanding into equity investment rather than relying on the debt alone for sustainable growth," emphasises Nayan Gala, Founder of JPIN.

Alternative Lenders

Alternative lenders are a new development in SME financing that businesses need to be aware of. These nonbank financial institutions provide financing for SMEs. Among these are invoice finance companies, internet lending platforms, and peer-to-peer lending networks. Alternative lenders are becoming more and more well-liked since they provide more flexibility than traditional banks. They usually have easier access to finance, which is crucial for SMEs since they must move quickly to take advantage of opportunities.

As per Pushkar Mukewar, CEO and Co-founder of Drip Capital, a California- and India-based fintech company that focuses on using technology to solve the working capital problem for SME exporters, "alternative lenders will continue to be in high demand to provide collateral-free working capital solutions specifically made for SMEs."

On Tuesday, Choice International Ltd., a leader in providing SMEs with cutting-edge financial solutions such as loans for working capital, loans for machinery and equipment, and invoice discounting, also revealed ambitions to extend its operations in North India. Ten additional venues will be opened by the group in the first half of FY 23–24.

"Going forward, we remain committed to assisting the growth and development of SMEs in India by giving them the required financial resources and expertise," states Kamal Poddar, MD of Choice International Ltd.

Also, there are many fintech players who are focussed on lending solutions for SMEs including Capital Float, FlexiLoans, NeoGrowth, Indifi Technologies, Aye Finance, Satya MicroCapital, Lendingkart, Kissht etc.

Finance with a Focus on Sustainability

Sustainability-linked funding is a recent innovation in SME financing that is taking off. The sustainability performance of a corporation is being correlated with the cost of financing in this trend. Companies that outperform the industry standard in terms of sustainability also pay lower loan interest rates. This trend promotes SME adoption of sustainable business practices, which can reduce expenses and improve their reputation.

The principal MSMEs financing institution, SIDBI, introduced a Green Finance Scheme in March last year to assist with this by offering up to INR 20 crore in support for initiatives such as efficient water management, wastewater treatment, carbon capture and storage, environmental protection, green building, and other initiatives.

Government assistance

Governments from all across the world are increasingly assisting SMEs. It is possible to receive grants, loans, tax breaks, and other types of aid. The government appreciates the importance of SMES to the local economy and is keen to assist them. SMEs in need of financing can consider looking into the help that their local government can offer.

The central government is offering various forms of financial assistance to startups and micro, small, and medium enterprises (MSMEs) so that the youth can utilise their talent and start their own businesses, Prime Minister Narendra Modi stated in a video message to the Rozgar Mela 2022 organised by the Government of Maharashtra.

According to the Economic Survey 2022–23, more than 39,000 compliances have been decreased countrywide by a number of authorities, including union ministries, state governments, and union territories. The trade finance ecosystem still needs to do a lot more to provide SMEs with real-time updates, including hassle-free online loan processing, digital invoicing, payment processing, the development of enhanced dashboards, and mobile tracking systems.

The recent announcement by the government to contribute 15% of the equity in the listing of new SMEs through a government pool is a positive step. We need more of these types of initiatives to demonstrate that the Indian government fully supports SMEs.

Collaboration

The growing trend of collaboration in SME finance needs to be taken into consideration by business groups. SMEs are cooperating with one another, lenders, and other stakeholders to obtain financing and expand their activities. There are many other methods to collaborate, including co-lending, joint ventures, and strategic alliances. SMEs who are looking for capital could consider forming alliances with other businesses to raise money and grow their businesses.

Indian conglomerates like Reliance Industries, Aditya Birla and the Tata Group are partnering with smaller companies to expand their business portfolios.

The future of SME finance is continuously changing, therefore businesses need to remain on top of the most recent trends. The aforementioned trends can help SMEs grow their businesses, cut costs, and make it simpler for them to get funding.