SME Futures Editorial
Funding to business: In India, the entrepreneurial spirit is alive and well, with more businesses being launched than ever before. Let’s look at the numbers–A total of 14,887 companies, including foreign firms, were incorporated in July 2024. According to the Corporate Affairs Ministry, 185,312 companies were registered in the financial year 2023-2024, marking the highest number of incorporations in any fiscal year in the country’s history. This represents a 15 per cent increase compared to the previous year, illustrating a dynamic startup ecosystem in India.
In addition, these registered companies also had a collective paid-up capital of ₹30,927.4 crore, which is higher than the ₹18,132.16 crore in FY 2023. As of March 31, 2024, there were approximately 4.76 crore (47.6 million) MSMEs registered on the Udyam Registration Portal and the Udyam Assist Platform in India and as per the unofficial data, there are over 63 million Micro, Small, and Medium Enterprises (MSMEs) in India. These enterprises contribute significantly to the Indian economy, accounting for around 30% of the country’s GDP and providing employment to over 110 million people. MSMEs in India play a crucial role in driving economic growth, fostering innovation, and promoting regional development. The sector is diverse, encompassing various industries including manufacturing, services, and trade.
However, amid this growth, access to funding remains a critical challenge for many entrepreneurs. As Kamal Mehta, Promoter Director of Parrami Finance Private Ltd., states, “Funding should never be an obstacle at any stage of business. Whether launching a startup or scaling an established company, having access to the right financial resources is crucial for success.”
Bridging the funding gap: The role of NBFCs
While India’s startup ecosystem is booming, many businesses still struggle to access credit from formal financial institutions. According to the Reserve Bank of India (RBI), only 30-40 per cent of Micro, Small, and Medium Enterprises (MSMEs) have access to formal credit. The remaining businesses often rely on informal sources or self-funding, which can limit their growth potential.
Mehta emphasises, “MSMEs will benefit more from the dynamic approach of Non-Banking Financial Companies (NBFCs), which are more agile in providing credit and tailored financial solutions to meet the unique needs of small businesses.” He believes that NBFCs have a vital role in supporting India’s economic growth by providing accessible credit to underserved sectors.
Strategic steps to overcome financial barriers
Entrepreneurs must take proactive steps to ensure that funding does not become a bottleneck. Mehta outlines several critical areas where businesses can focus to navigate financial challenges:
Maintain Proper Financial Records
“Accurate bookkeeping, timely tax compliance, and regular audits are essential for demonstrating financial health and transparency,” Mehta advises. These practices help build trust with investors and financial institutions.
Build a Strong Credit History
Ensuring timely payments, maintaining optimal credit utilisation, and monitoring credit scores are crucial steps for businesses to build credibility. “A strong credit history opens up a wider range of funding options,” he adds.
Have a Robust Business Plan
Mehta highlights the importance of a growth-oriented business plan with clear financial projections, market opportunities, and risk mitigation strategies. “Investors are more likely to back a business with a clear path to profitability and growth,” he says.
Innovative funding avenues for entrepreneurs
In addition to traditional funding methods, several innovative avenues can help businesses secure the necessary capital:
Venture Capital and Angel Investors
“For startups, venture capital (VC) and angel investors provide not just capital but also mentorship and strategic advice,” says Mehta. To attract these investors, startups need to focus on innovative ideas with high growth potential and a robust business model.
Crowdfunding: A Modern Approach
Mehta points to crowdfunding platforms like Kickstarter and Indiegogo as powerful tools for entrepreneurs to raise funds without giving up equity. “Crowdfunding not only provides capital but also helps validate the product in the market, creating a built-in customer base,” he notes.
The Importance of Managing Cash Flow and Scaling Up
Once a business is operational, managing cash flow becomes critical. “Poor cash flow management is one of the leading causes of business failure,” Mehta cautions. Entrepreneurs must maintain a balance between receivables and payables to avoid liquidity issues. He also stresses the importance of efficient working capital management and forecasting cash flows to anticipate potential shortfalls.
When it comes to scaling up, securing growth capital is often necessary. Mehta suggests that businesses explore various sources such as bank loans, private equity, or reinvesting profits to fund expansion, market entry, or research and development efforts.
Leveraging technology and digital tools
“Invest in technology and innovation to enhance business efficiency,” advises Mehta. Utilising digital tools, data analytics, and automation can significantly reduce costs and improve operational efficiency. For example, leveraging GST data for cash flow assessment has enabled quicker loan turnarounds for MSMEs.
Vision for a seamless funding ecosystem
Mehta advocates for platforms like the Open Credit Enablement Network (OCEN) and the Account Aggregator (AA) framework, which are designed to facilitate faster and more efficient credit flow to small businesses. “These platforms can help financial institutions reach a broader customer base at a lower cost,” he says, emphasising their potential to bridge the gap in credit access.
Funding as a catalyst, not an obstacle
In conclusion, Mehta reiterates that while funding is a critical component of business success, it should never be viewed as an insurmountable barrier. “By exploring various funding options, managing cash flow wisely, and adapting to the evolving economic environment, businesses can overcome financial challenges at any stage.” He calls on entrepreneurs to approach funding creatively and persistently, ensuring that financial constraints do not limit their potential for growth and success.
