Quarterly Journal on Management
From the publishers of THE HINDU BUSINESS LINE
Vol. 2 :: No. 2 :: August 1998
The Whirlpool
K. Nitya Kalyani
It may be harsh, but it is a fact. He that has, gets. True certainly of industry when it comes to finance, more painfully so when it comes to small businesses. Many reasons are behind this, but some of them are more obvious than others.
A new face, braving a new business unproven in viability or success chances, without any clout to attract a loan, no collateral security and very little or no equity to speak for him is not exactly what bankers' dreams are made of!
What it is, is an entrepreneur's nightmare. But the sad fact is that this difficulty in accessing finance is not only the lot of a new entrepreneur. It continues to some degree or another even after he has proven himself.
Bankers, though they have been thrust with the obligation of lending to the small scale sector, or maybe because of it, never seem to live up to the expectations of the sector. Ironically, it is the larger, usually cash rich companies, that the bankers are wooing, and seem to be happy to service.
The main reason the lenders quote, and only informally, is that the small sizes of the loans for SSIs mean essentially that the lender has a fragmented portfolio that is more bothersome to administer. One large loan is easier to take care of than several small ones, each of which requires personal attention, and indeed, together may bring in the same returns as one large loan would.
Speaking of startup businesses, the main problem of the lender is the inability of the entrepreneur to bring in equity. There is also the subsidy-conscious attitude of the small scale sector to expect doles for everything and 100 per cent finance in the bargain. Unrealistic, specially since there are few venture capital outfits in the country, but try telling the small industrialist that no one owes him a favour.
If a first time businessman is unfamiliar with financing requirements, he is even less prepared for the numerous clearances he has to get and the mounds of documentation he has to produce to get them.
Procedures for accessing finance are as cumbersome, and the one man show that most small businesses are, documentation and endless follow up is quite beyond the scope of a single man who is trying to juggle production, marketing and twenty one other functions.
Another peculiarly Indian problem is that though the financials of many entrepreneurs are comfortable, they may not be so on paper. Wealth from unaccounted turnover or profits, which the local bank branch manager may well be aware of, and which offer the cushion he wants while lending cannot be the basis of the bank's lending to him, as these will not be reflected in the official papers. In other words, there isn't adequate balance sheet comfort that small business can provide.
Other deterrents to comfortable lending to a small business relate to the managerial capability of the entrepreneur and his marketing skills, the strength of the product to brave the vagaries of the market, and the financial strength of the entrepreneur to wait out a lull in the market place, and in the case of exports which many small units involve themselves in and excel in, a host of other factors like markets abroad and foreign exchange market trends.
While none of these is peculiar to small business, it is this sector that is more vulnerable to these factors, and are more in focus now with fewer products reserved for the small sector and freer imports, more domestic competition and the general recessionary trend.
If getting finance is so difficult for the small business sector, the tragic irony of its existence is that it is actually providing big industry with working capital. Many small units are suppliers of components and rely on one or a few large units for their livelihood. Most large units take their time to settle their vendors' bills, freely transgressing any industry credit period limits, thus forcing the small units to bear their working capital costs.
Being dependent on their buyers for orders, the small units have to grin and bear these delays for, given the nature of their operations, they can't threaten to discontinue supply of parts for fear of losing the business to countless competitors. So, any finance that a small unit takes is put to more use by its buyers rather than by the unit for its own production.
The small scale sector has also itself to blame for many of the lending obstacles they encounter. Large numbers of eager entrepreneurs, with more of a will to get into business than an idea of how to do it are setting forth bravely, many a time only to mimic what his neighbour is doing!
Go to a meeting of potential entrepreneurs and you will, apart from an impressive bright eyed eagerness and endless self confidence, often hear the phrase, ``I want to do SOMEthing, do you have a good business idea you can give me?'' This is rather like standing before a godman and waiting for him to materialise holy ash. SOMEthing, after all! While the logic is that a product or service idea should virtually be an organic decision based on the needs of the market and the technological and marketing capability of the entrepreneur, not to speak of his financial capability.
If there is very little original thinking in terms of products ideas, markets or marketing, leading to me-too products which are virtually expected to sell themselves, there is even less of an idea about finances, financing and collecting their bills, leading to a classic small business downward spiral. Many small industrialists can't distinguish turnover from profit. To their disaster and the despair of the lender.
If six out of ten entrepreneurs burn their fingers making a plastic part since their neighbours are selling them by the kilo and seem to be making easy money, they endanger the very people they are imitating. Being low technology, easily replicated products, they face the danger of being imitated quickly, literally attracting competition!
Most others who do have a good product idea don't see beyond the product and the first order. In fact, it is in a startup business that one has to do more extensive study on what is in store because Murphy's Law seems to prefer this area of life!
Given all the warts, most small industrialists and the few really enthusiastic financiers that they seem to have, agree on a few things as critical to improve the situation where small businesses lose all the advantage of the verve and energy of the entrepreneur in the endless quest for funding.
From the new entrepreneurs' point of view, this means more homework to face the real world in terms of better awareness of funding requirements, especially in the initial periods, the equity they would be required to put up, the reality of collateral security requirements, a conservative look at markets, the marketability of the product and so on.
What lenders should do boils down to something very basic. Be business-like about the decision say small scale industrialists. Tell us whether or not you are going to give the money. And if you are, do it quickly. Because the availability of finance is much more critical than its cost.
Small units have proved their grit to stay in business and produce results too. They account for most of the country's exports and are also the leading employment providers. But that is as a sector. The funding woes of individual units makes one wonder what keeps the entrepreneur going in the first place.
``Sometimes it seems sheer pigheadedness,'' said one entrepreneur. ``But at the end of the day, even the frustration of dealing with the various government agencies and the financiers can't take away from the sense of achievement I have in my own business.''