Clipped from: https://economictimes.indiatimes.com
Businesses can be small in size, but big in reach, so that they are not at the mercy of a handful of customers. Digital can be truly empowering in this regard.
Small businesses find themselves in a precarious situation today. Yes, the economy is in a bad shape now, but it was so even before the outbreak of COVID-19, and small businesses were undergoing a prolonged period of lacklustre demand. This has since worsened. Assuming the night is darkest just before the dawn, small businesses can hope to reboot operations once the dust settles. Let’s see how a changed approach towards finances can help speed things along.
Alleviating the punishing interest burden: The Reserve Bank of India (RBI) has been criticised in the past for keeping interest rates high, making it difficult for small businesses to compete with conglomerates or foreign competitors who enjoy cheap credit in currencies like the USD. While the RBI has dramatically reduced interest rates over the last two years, banks have hardly passed on this reduction to their customers, constrained by their own limitations in the form of high NPAs and such.
The recent directive of the RBI for banks to link their interest rates to external benchmarks is a step in the right direction. Small businesses will do well to shift to the new regime where rate cuts from the central bank are reflected sooner in the rates they lend from banks.
Differentiating between liquidity and solvency: While banks expect their borrowers to be solvent over a period of time, cashflow mismatch is something they have ignored for quite some time. Let’s take a hypothetical. Say a small-scale manufacturer from Tirupur supplies PPEs to government hospitals. While he enjoys favourable demand (translating to good top line), the hospitals are making things difficult by delaying payments, thereby stretching out the time to realise the proceeds of his sale. In this case, what the small business owner needs is temporary funding to meet his cash crunch – cashflow financing – rather than funding to buy assets.
SBI has recently announced the change of the credit appraisal model for small businesses from asset-based to cashflow-based financing. This will be a gamechanger, leading to easier funding for businesses that do not fit the traditional working capital models of large corporates that the banks are used to funding.
Going digital to reduce concentration risk: This lockdown period saw our neighbourhood “kirana” shops innovating quickly to meet public demand – by taking orders over the phone, arranging hyper local door delivery, and the like. On the other end of the spectrum, India’s largest company is also doing the same with the test launch of JioMart in Mumbai that provisions orders of groceries over WhatsApp. Both are essentially reaching out to a wider customer base, now that digital is trumping brick-and-mortar, even in sectors like education.
Businesses can be small in size, but big in reach, so that they are not at the mercy of a handful of customers. Digital can be truly empowering in this regard. A few weeks ago, the weavers of rural Bihar, with their garment inventory stuck due to lockdown, were able to sell sarees through Twitter promotion!
Green shoots and greenfield industries: The emotional backlash against China in these times could potentially develop into an economic backlash, with countries across the globe wanting to diversify their supply chain and neutralize their dependency on China. In India, for instance, discussions are full-on with foreign companies encouraging them to see India as an alternative to China. While this effort requires broader, centre-level policy changes to materialize, it opens avenues for small entrepreneurs to grab their share of the market – which is currently dominated by China.
In such cases, small businesses can opt for supply chain financing, that helps them to cheaper credit from banks based on the comfort factor provided by MNCs who avail goods/services from them. Not only does the Indian MNC get assured funding from the banking system, but its small suppliers (who may not be well known or have enough bargaining power) also get to secure cheap funding, so that the entire supply chain is well equipped for global competitiveness.
Keeping tabs on borrowings: Entrepreneurial ventures need to keep their debt burdens at manageable levels. Another black swan event like the COVID-19 pandemic will likely wipe out debt-laden businesses. Small businesses that compromise on growth temporarily by keeping indebtedness low are likely to sustain a good momentum of growth over the longer period.
While banks have a responsibility to ensure that loan funds are put to optimal use, borrowers also need to realise that resorting to uncouth tactics, like funding long-term assets using working capital borrowing, is only going to damage their competitive streak by permanently tarnishing their image in the market.
(The writer is CEO, BCT Digital.)