Expansion is essential for a business to meet the increased demand and diversify revenue streams. From large companies to Small and Medium Enterprises (SMEs), every business requires an expansion for business growth and development.
SMEs are common in India and have contributed significantly to India's GDP. An SME is similar to a large organisation, except it generates revenues and assets and has fewer employees to carry out all operations of the business. Still, the SME sector needs assistance in business funding to improve its day-to-day functions and long-term business growth.
Despite growing constantly, an SME faces many challenges in accessing funding for business development. Without sufficient funds, it can be difficult for the SME to expand its operation, invest in new technologies, and stay competitive in the market. So, in this article, we understand SME finance meaning and take a look at options available for SME lending India.
Which Companies are Covered Under the SME sector?
Before learning about the most suitable option for SME lending India, let us understand the difference between micro, small, and medium enterprises.According to the Micro, Small, and Medium Enterprises Development Act, businesses are classified into micro, small, and medium enterprises depending upon the investment made in plant and machinery. A business is considered a Micro Enterprise if it has an investment limit of ₹1 Cr, while those having an investment range between ₹1 Cr to ₹10 Cr are small enterprises. And enterprises with investments up to ₹50 Cr are categorised under Medium Enterprises.
To have a better understanding of the classification of MSMEs, have a look at the table below.
How does SME Funding help in Business Growth?
An SME can improve and expand its business with the right funding and sufficient funds. Yet SMEs face a significant financing hindrance. As finance is crucial for the success of an SME, and here are some reasons why finance is essential for an SME:- Funding for operations: Finance supplies the money required to carry out daily tasks like purchasing inventory and paying other expenses.
- Investment in growth: Finance enables a business to invest in expansion opportunities like entering new markets, creating new products, or acquiring smaller businesses.
- Risk Management: Finance aids in risk management by offering insurance coverage and building financial reserves.
- Compliance with Regulations: Finance ensures that a company complies with legal and regulatory obligations, like tax laws, financial reporting standards, and rules unique to a given industry.
Best Funding Options for an SME to Expand its Business
SMEs can obtain funds from the government or non-profit organizations. These grants are usually awarded to SMEs that are working on projects that align with the goals of the organisation providing the funding. SMEs don't need to repay these grants. However, these grants often come with specific conditions, such as reporting requirements or restrictions on how the funds can be used.
Equity Financing
Equity financing is a common way for startups and early-stage SMEs to raise funds without taking on debt. This approach involves selling company shares to investors in exchange for capital. These individuals become shareholders and have a say in the company's decision-making process by investing.
Debt Financing
Debt financing is when SMEs borrow money from a lender, like a bank or financial institution, to finance their operations or specific projects. The terms of the loan, such as interest rates and repayment periods, are determined by the lender. SMEs can obtain loans or lines of credit to fit their financial needs and are obligated to make regular payments until the loan is fully repaid.
Crowdfunding
In crowdfunding, funds are raised from a large number of people through an online platform. SMEs can launch a crowdfunding campaign to attract investors who are interested in supporting the particular SME business.
Venture Capital
Venture capital involves raising capital from specialized investors who are looking for high-growth potential in exchange for equity in an SME. Venture capital is typically used by SMEs that have already established their business and are looking to expand rapidly.
HDFC Bank offers working capital services across India with multi-location banking. Any SME can opt for fund-based and non-fund-based finance, including cash credit, overdraft, LoC, etc. In addition, the SME bank offers term loans with customised repayment options. SMEs can take a business loan of up to 50 lahks. With such features, HDFC Bank is the ideal choice for SMEs looking for business expansion funding.
Here are several funding options available to SMEs:
Legal GrantsSMEs can obtain funds from the government or non-profit organizations. These grants are usually awarded to SMEs that are working on projects that align with the goals of the organisation providing the funding. SMEs don't need to repay these grants. However, these grants often come with specific conditions, such as reporting requirements or restrictions on how the funds can be used.
Equity Financing
Equity financing is a common way for startups and early-stage SMEs to raise funds without taking on debt. This approach involves selling company shares to investors in exchange for capital. These individuals become shareholders and have a say in the company's decision-making process by investing.
Debt Financing
Debt financing is when SMEs borrow money from a lender, like a bank or financial institution, to finance their operations or specific projects. The terms of the loan, such as interest rates and repayment periods, are determined by the lender. SMEs can obtain loans or lines of credit to fit their financial needs and are obligated to make regular payments until the loan is fully repaid.
Crowdfunding
In crowdfunding, funds are raised from a large number of people through an online platform. SMEs can launch a crowdfunding campaign to attract investors who are interested in supporting the particular SME business.
Venture Capital
Venture capital involves raising capital from specialized investors who are looking for high-growth potential in exchange for equity in an SME. Venture capital is typically used by SMEs that have already established their business and are looking to expand rapidly.
What is the Best Solution for SME Lending?
Now that we have understood SME finance meaning, it can be seen that they are essential for a country’s economic growth. The SME sector of India has made an enormous contribution to the economic growth of the country and a significant upsurge in job creation. To achieve such goals, SMEs need the right financing. SMEs can mitigate their cash flow problems with effective working capital solutions by HDFC Bank. And to help business owners, HDFC Bank is providing adequate financial assistance.HDFC Bank offers working capital services across India with multi-location banking. Any SME can opt for fund-based and non-fund-based finance, including cash credit, overdraft, LoC, etc. In addition, the SME bank offers term loans with customised repayment options. SMEs can take a business loan of up to 50 lahks. With such features, HDFC Bank is the ideal choice for SMEs looking for business expansion funding.
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