Is working capital denied?: Explore options
Many a time when there is no or less working capital financed, the SMEs tend to curse the at the fate than looking around for possibilities thus aggravating the distress.
In the previous fortnight, we had discussed the evils of starting a new project without proper arrangement for sufficient working capital under the blog titled: Starting a new project without tying up working capital – A suicidal act for SMEs.
Some of the readers suggested discussing the solutions to deal with such a situation. Hence I will extend the discussion on the above issue
We all are well aware of the impact of not securing the required level of the working capital facility. For an SME, in the first place, securing orders for manufacturing is fraught with uncertainties and itself a major challenge. Having to abdicate such orders so secured for want of working capital will cause heartburn. In facts it is listed as one of the major factors for the underperformance of the SME segment in India and as well as in the world.
Having been compelled to endure the difficult situation, it is very important for entrepreneurs to act fast. We suggest adopting one or more of the following remedies for overcoming the situation of not having tied up working capital or to work under the constraint of lesser working capital limit:
- Make a case before higher authorities for correcting the anomaly: Banks normally work on the hierarchical structure. It is possible to secure the required support sometimes through the intervention of higher officials. SMEs should seek intervention if they find that branch is not responding positively.
- Explore bill discounting facility: Sometimes seeking additional funding arrangement through bill discounting can be a feasible solution provided the buyers of your products are reputed ones. It may not be a universal solution, but it can work in certain circumstances. If you have bills of reputed companies, some NBFCs are willing to extend such facility.
- Seek to take over by another bank before the stress appears: In any new project, the execution risk is a major concern. Many banks are not willing to partake during the stage of construction, however, they are willing to take over at the time of the beginning of operations. Such an action should be taken before the stress appears in the account because they will not be comfortable to take over if there is stress.
- Look for non-conventional loan products like unsecured loans/ escrow loans: There are many NBFCs extending unsecured loans based on order books by creating an escrow cover of recovery of their loans and loans are without collaterals security. It costs quite a higher rate of interest. However, in the emergent situation, it will help to keep the operations running without hassles. Similarly, in non-metro regions, the cooperative banks extend accommodative loans to help members to tide over the crisis.
- Seek refuge under regulatory guidelines: Nowadays the regulatory environment to help SMEs to tide over the difficulties has seen significant improvement. Following are the key instruments available to deal with the crisis:
- Gazette Notification from Ministry of MSME – Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises( Ref: The Gazette of India- Extraordinary, Part II, Sec 3(ii) dated 29th of May 2015)
- RBI Guidelines- Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises (MSMEs)( Ref: RBI/2015-16/338 FIDD.MSME & NFS.BC.No.21/06.02.31/2015-16 March 17, 2016).
- Thirdly the Insolvency and Bankruptcy Code which can halt the recovery action and make all the stakeholders come together to find an amicable solution. However, it is restricted to limited companies at present. (www.ibbi.gov.in)
Make use of the above
- Resort to legal defence to prevent hostile attempts to disrobe the business: There are no specific legal remedies to compel the bank to extend working capital. However legal process can be initiated if the bank does not agree for resolution under regulatory guidelines listed above.
- Seek partners: Sometimes it possible to overcome the challenge by taking partners. Since the unit is ready (Similar to the case mentioned above), there is no execution risk and hence comfort level for investors will be high to join the hands. Such avenues should not be ignored.
- Explore job work to keep the unit engaged: In certain circumstances, it is better to seek job work to keep the unit running and recover the at least the recurring expenses. This may not be an optimum solution but can help to improve the standing in the market and may lead to investment at best.
- Seek intervention of policymakers and industry bodies to build a case: Many a time, the intervention by the policymakers helps to make people appreciate the gravity of the situation and the decision makers may be prompted to act. SMEs also may explore seeking action under collective forums like industry associations to bring about changes in the mindset among the bankers. This may lead to more refined policy support in the future and will benefit the SME community.
- Keep the focus on increasing earning while continue to fight the challenge: It is obvious that the problems in the unit will be bogging down the entrepreneurs and it is also likely that they may loose focus on existing earning avenues. However, it is necessary for an entrepreneur to continue to focus on the existing streams to earn and support the family while pursuing the resolution of the challenges. Because the solution may not come immediately and you need to endure yourself till such time.
There is no specific solution to the challenge faced by SMEs in such circumstances. However one needs to keep looking for a way out of the impasse. While doing so we urge all entrepreneurs to keep two aspects in their mind:
- Time is very precious in taking a decision: Delay in finding resolution may lead to deterioration in the capability of your business unit and financial standing will continue to degenerate. Hence one should move quickly to find an optimum solution in the circumstances.
- Always Keep the books of account updated and amenable for those who want to invest or lend to money resolve the challenge.
Timely response is essential in the distress situation of not having working capital. Entrepreneurs need to act fast and also approach the matter in a methodical way because there is no ready solution.