The universe of financing options in the emerging markets is still dominated by conventional sources primarily bank financing. Despite the talk about supporting Greenfield ventures and Small and Medium Enterprises (SME’s), we still do not have a comprehensive range of funding solutions in these markets. Credit penetration to the SME’s in the emerging markets is incredibly low as compared to the OECD countries. Banks are hesitant to lend to SME’s without collateral in the form of property, insurance, and third party guarantees.
Even the private equity and the bond markets are at nascent stages for start-ups. Speaking from my experience in the Middle East, private equity money is still chasing the bigger deals, with the backdrop of overall consolidation in that space, with bigger firms emerging stronger and the weaker ones whittling out. Likewise, in the bond market, though the breath and the depth of the markets have improved drastically with sovereign and other blue-chip issuances over the last couple of years, the borrowing access still remains questionable to starts up and SME’s. There is a credit gap of as much as $250 billion across the Middle East and North Africa (MENA) region.
Studies suggest that 94 per cent of new businesses fail in their very first year, with a lack of funds being a common pain area among them. Having said so, it is essential to emphasise the fact that financing is not just required in the initial phases of the business. Even established firms like Paytm, backed by Softbank, are still raising investments to thrive in the current start-up ecosystem. It is not only essential to identify the sources that provide funding in the beginning but also up to ensure that the first five to ten years of the business is not suffered due to lack of financing.
Many times, entrepreneurs might not have the knowledge of the spectrum of financing solutions in the market as the solutions in the emerging markets may not be as comprehensive as in the western markets. Hence apart from relying on conventional methods of raising funds from friends and family, Venture Capitalists, Angel Investors, and Bank Loans, there is a pool of unconventional methods that the founder can use to meet the financial requirements.
PE & VC has been the go-to option for many entrepreneurs. However, in many situations, the founders might not want to go in that direction to avoid giving up control of their business idea. Let look at a whole host of other unconventional methods that have started to loom over the horizon. Let us start with the usual suspect that is Crowd funding. It brings investors and entrepreneurs together on a single platform, from where the former can choose from a vast number of projects available and also how much to invest in them. There can be a number of investors pooling their money into a single project and can invest as little as $10. One of the core benefits of the method is to understand the feasibility of the business, as during the process many investors screen it simultaneously. This can call for improvisations on the business model and also the product, which comes handy in the long run to attract VCs as the business progresses.
Another method is to reach out to business incubators. Business incubators provide attractive incentives for startups and early-stage entrepreneurs, including administrative support for setting up a business and networking opportunities with like-minded innovators. They also go onto provide mentoring to help the businesses move forward and return the services they might take a stake in the company or charge monthly rentals.
For companies supplying products and services on a regular basis to the customers, factoring and invoice advances can be an option. In this, a provider loans money to the businessperson on the basis of past billable. The money is returned back to the provider once the customer has paid it. It is actually one of the simplest ways to keep the business running instead of being completely dependent on payment from customers. Considering that timing is a crucial factor in the financing operations, it is also needed to note that in case of factoring financing, depending upon the credibility of the business, one gets qualified to in around three to ten business days and can receive funds within three to five business days after that.
Mortgaging loans against the assets can also be a viable option in the businesses that employ a fleet of assets for their day to day operations. For example, if you are planning to open a movers and packers service, then borrowing money by using the vehicles employed, the office space or even the garages can come in handy. The companies raise as much as 80 per cent of the original value of the asset from the mortgage funds, without giving a stake in the firm to a lender, that too with low-interest rates with adjustable repayment dates.
B-Plan competitions are very prevalent these days wherein contestants are asked to pitch away their ideas in front of potential investors and the winner takes away a whopping amount of money that can kick-start their business. It does not provide an opportunity to winners, but also to those whose ideas were great but not enough to win the contest. These competitions and conclaves are attended by a large number of investors and hence for the budding entrepreneurs it presents ample opportunities for networking, and who knows one feedback or input from them can improve the chances of receiving funds in the future.
We can hope to come across a whole host of newer and more innovative financing solutions with the advent of the fintech revolution, which offers companies and individuals access to alternate sources of financing. I believe this will have a cascading impact in the world of start-ups and SME’s with fintech firms bringing the borrowers and lenders on a common platform, resulting in lower borrowing costs, more innovation, and a greater reach.