Credit hack for SMEs: No more struggles
What's the story
SMEs are the backbone of India's economy, contributing significantly to employment and GDP.
Despite their importance, many struggle to grow due to limited access to finance.
Credit enhancement schemes can address this challenge by making it easier for SMEs to access loans by improving their creditworthiness.
This article explores how these schemes work and why they're beneficial for Indian SMEs.
Basics
Understanding credit enhancement
Credit enhancement involves the use of financial instruments or measures to strengthen a borrower's creditworthiness.
For India's SMEs, this translates to obtaining extra guarantees or collateral that can be showcased to lenders.
By doing so, an SME can secure loans more readily and at more favorable interest rates than would be achievable without such backing.
Support
Government-backed schemes
The government of India has established various schemes, including the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), to support SMEs.
This scheme offers credit guarantees to banks and NBFCs for collateral-free loans up to ₹2 crore.
By encouraging financial institutions to lend more freely to small businesses, it improves SMEs' access to crucial funding.
Advantages
Benefits beyond financing
Apart from providing easier access to finance, credit enhancement schemes have a few other benefits for SMEs.
Lower financing costs: By improving borrowing terms, businesses can save money on financing costs. This saved capital can then be reinvested into the business for growth or innovation.
Enhanced negotiation power: A stronger credit profile also benefits businesses by making it easier to negotiate favorable terms with suppliers and partners.
Options
Private sector solutions
While government initiatives are important, private sector solutions can also provide significant opportunities for credit enhancement.
For example, certain financial institutions offer partial credit guarantees against SME loans or invoice financing services that help manage cash flow more effectively.
These solutions not only help in accessing funds but also build a strong financial foundation for future growth.
Action plan
Practical steps forward
For an SME seeking to benefit from credit enhancement schemes, the first step is to evaluate its financial health and identify specific needs.
Working with financial advisors or consultants with expertise in this field can help determine the most suitable government-backed programs or private sector options available.
Additionally, keeping strong financial records and showing steady revenue growth will increase confidence when applying for enhanced credit facilities.