The Government of India's recent announcement of its intent to increase its market borrowings by Rs 40,000 crore to fill in the sluggish tax collections gives a clear signal that interest rates will continue to remain high in the short to medium term. In this challenging economic environment, access to funding and cost of funds are two key aspects that every SME entrepreneur should manage effectively to maintain the health of the enterprise. A few proactive measures can go a long way in helping entrepreneurs manage their financial requirements in a cost-effective manner. These include:

MULTIPLE BANKING

SMEs should strive to nurture their relationship with more than one bank on a continuous basis, especially when their liquidity position is healthy. Many healthy and well-performing SMEs have faced a crisis situation because of the tight liquidity position of their bankers, who may suddenly go slow in enhancing their credit facilities, thereby choking growth opportunities for the SME. Though multiple banking arrangements involve a slightly higher effort and cost in terms of processing fees, commitment charges, etc., the benefits far outweigh the downside of depending on a single bank.

NBFCS LEND AGGRESSIVELY

In the current financial market, NBFCs are the only players that are aggressively expanding their asset books, and specifically target SMEs to reach their business commitments. Though cost of funding through NBFCs is slightly higher — usually by 1 per cent to 1.5 per cent higher — the terms of funding, such as security / collateral requirements, structured repayment terms, etc., are more benign compared to their banking counterparts. SMEs that have a healthy banking relationship can tap NBFCs for additional fund-based facilities, such as working capital term loans, besides traditional NBFC-products, such as vehicle and equipment financing.

COMMERCIAL PAPER MARKET

Commercial Paper (CP) is a very useful instrument for corporates to reduce their interest costs. The CP market in India has grown rapidly in the last two years — from less than Rs 40,000 crore in 2009, to more than Rs 1.4 lakh crore currently. CP is essentially a replacement borrowing for working capital funding, with substantial interest savings, which are as high as 3-4 per cent for well-rated corporates. However, the CP market is open only for corporates with high credit-worthiness, and of reasonable size. Of late, many investors are keen to subscribe to Commercial Paper issued by new entrants, which augurs well for highly-rated corporates that are yet to enter capital markets.

A common feature of turbulent times like this is the stretching of the turnaround time for getting any fresh funding. In the current market, any new debt facility for an SME could take more than 2 months, while fresh equity infusion could take as much as 6-9 months. Entrepreneurs should plan well in advance to take into account these stretched timeframes, to avoid serious liquidity problems.

(The author is ex-Director Ratings, CRISIL and Co-founder, RiverBridge Investment Advisors.) >http://ChaseCut.blogspot.com

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