According to a World Bank study, close to 40% of the MSMEs in developing countries have poor or limited access to formal credit. Stringent lending criteria are being imposed on the MSMEs by traditional financial institutions that are looking at them under the purview of high risk lending. In India, many financing mechanisms and schemes have been introduced by the government like “Make in India”, Pradhan Mantri Mudra Yojaya (PMMY) and others that have given a significant boost to the MSMEs in the country. The Ministry of Micro, Small, and Medium Enterprises (MoMSME) will celebrate ‘Udyami Bharat - MSME Day’ on 27th June 2024. This event is supposed to offer an opportunity to key stakeholders, including policymakers, large companies, financial institutions, and the international community, to discuss and exchange ideas on the legal reforms needed in the MSMED Act for the growth and sustainability of MSMEs.
“Access to funding remains a significant challenge for startups and MSMEs in India. Facilitating a conducive environment for venture capital investments, creating alternative financing options, and promoting angel investments can bridge this gap and propel the growth”, mentioned Sukant Mishra, MD, Octagon International FZCO.
The MSME economy plays a vital role in the country’s growth by creating employments for citizens, stimulating innovations on a native scale and adding considerably to the country’s GDP. Financing challenges for MSMEs can result in the potential downfall for many businesses and can be detrimental to the business ecosystem altogether. Therefore, it is important to explore new age finance models that can ensure steady business growth and offer sustainability to the MSME sector.
This model has emerged as one of the most innovative and safe for MSME financing. It perfectly aligns with the point of view of the investors as well as the businesses concerned and associates the repayments directly to the revenue generation. This is very different from the repayment structure that is incurred on traditional loans which can be burdensome for businesses during economic crisis or low business growth. Revenue based financing model allows MSMEs to repay a loan from a percentage of their revenue until complete repayment of the investor’s principal. This flexibility is making it a compelling option for sustainable growth of MSMEs.
To give an example, a company that provides revenue-based financing to MSMEs (Micro, Small, and Medium Enterprises) is Clearco. The company offers funding to businesses based on their revenue performance, allowing them to obtain capital without giving up equity or going into traditional debt.
“Expeditious access is crucial for businesses facing time-sensitive opportunities or urgent financial needs. Moreover, the revenue-based financing model ensures liability-free financing, with repayments tied directly to a company's revenue”, mentioned Saahil Goel, Co-founder & CEO, Shiprocket.
Impact investing is currently emerging as one of the vital tools for MSME financing. It is one of the best examples for sustainable business practices that have been acknowledged by organizations worldwide. This model goes far beyond traditional financing mechanisms facilitating higher production of goods and magnifying social and environmental impacts. This not only ensures growth to businesses but also holds promises for timely financial return for investors. This mechanism aims at investing capital in projects that have the capability to address the required environmental and societal issues and ensure long term financial viability. Impact investors use strict measurement frameworks and monitor essential metrics and indicators to assess how well the initiatives they support can bring about a positive change in the society.
In this regard, a company that provides impact investments to MSMEs (Micro, Small, and Medium Enterprises) is Root Capital. It focuses on lending to agricultural enterprises in Africa, Latin America, and Southeast Asia, aiming to improve rural prosperity and promote sustainable development.
"Impact investment in MSMEs is crucial for driving sustainable development. These enterprises are the backbone of our economies and have the potential to create significant social and environmental impact if adequately supported", mentioned Sir Ronald Cohen, President, The Global Steering Group for Impact Investment.
Green financing platforms are enabling MSME access to green bond capitals. Supervising authorities are governing these platforms and issuing green bonds in order to disburse them among the MSMEs through green loans. Here, we can see that eligibility criteria are being developed to select the right MSMEs that can avail the loans. These criteria are primarily based on a company’s environment profile and business projects that aim at mitigating environmental impacts. On the other hand, governing institutions can loan the proceeds of green bonds to financial institutions which would carry that forward and disburse among the eligible MSMEs. Currently, the green loans are being provided as term loans, revolving credit facilities, and other debt instruments.
To give an example, the Small Industries Development Bank of India (SIDBI) has adopted a three-pronged approach in order to provide concessional financial assistance through dedicated Green Finance Schemes for mitigation and adaptation projects in MSME sector. It is supporting various development activities leading to enhanced awareness and creation of an ecosystem to facilitate the adoption of climate resilient measures by MSMEs. The schemes are also encouraging other Banks/FIs to finance energy efficiency projects through training, hand holding and risk sharing facility support.
“India’s green bond market has witnessed significant growth in recent years. Issuing green bonds can attract investment from both domestic and international investors dedicated to sustainable projects”, mentioned Sangram Singh, Head – Products, U GRO Capital.
Over the decade, various innovative financing models like the above and others have emerged in the business ecosystem that have been able to eliminate all the financing complexities for MSMEs and shown them the way for sustainable business growth. We will be able to witness more such measures coming into the scenarios in the coming years.
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