SMEs in Distress- Beware of ‘Soldiers of Fortune’

When in distress, many SMEs chase new money and normally end in traps of mischievous elements who make tall promises and swindle money.

I recently met one entrepreneur after a gap of two years. Once he had a flourishing business in excess of Rs 50 crores. He had built the business by himself brick by brick. Having come from a middle-class family, despite the success, he stuck himself to the higher values-Extremely affable, god-fearing, and committed to meet promises.

The back to back the introduction of policy measures – Demonetisation and GST-pushed him to the slippery position. Before he could make the required changes in the business process and financial management, the situation went out of control. The liquidity stress started appearing and he started defaulting on the payments resulting in personal insinuations from the providers of loan and suppliers which he never experienced in his life. On the other hand, the trade cycle got disrupted and order flow dried up as his principals started realigning their business to adjust to the new reality.

While he was battling in multiple fronts he started getting offers for a comprehensive bailout. Obviously these offers attract him as he was already exhausted to deal with demand from various people.

They offered to arrange a very large sum and consolidate the borrowings into a single source along with a very attractive rate of interest much below the RoI applicable to well-rated borrowers despite being highly stressed.

The waiting is still on…

Unfortunately, he is still hoping for the new money ever after two years. In the meantime bank and NBFCs have initiated recovery action against his properties and have been establishing their rights.  The business is closed and the family is living with agonising pain and praying for better days.

It is commonly observed among the entrepreneurs in distress:

Most of the entrepreneurs in financial difficulty look for quick solution fearing that continued distress may affect the business and their reputation.  Having pledged every asset to lenders they fear the impact of distress much more than what it really is. That in turn, prompts them to seek an instant solution. They tend to react to any proposal with much more intensity and avoid confronting those mercenaries to understand their credentials.

Fortune soldiers- Mercenaries who boast  about exclusive access to money:

These agents claim that they have an exclusive arrangement to secure money at very soft terms. They show a lot of empathy and promise to work for clients with all the sincerity.  If we analyse the experience of interaction with these fortune soldiers there are commonalities in their approach. Some of them are :

• They present as if they enjoy a high degree of confidence of the financiers.
• They seek very small fraction as advisory fee and a still smaller fraction as advance
• Terms are so compelling to justify taking risk of giving advance
• The advance will be packaged as a commitment fee or insurance premium to bring the money from abroad etc
• They do not reveal much about the financier.
• They prop up the  names of people in higher offices
• They set the meeting in very premium places

Eventually, their target is to extract advance as much as possible, keep giving excuses to frustrate and eventually make one go away.

Entrepreneurs are more vulnerable in India for financial distress than in any other country:

The options for turnaround are limited in India. The general perception of the stressed enterprise is highly prejudiced. Many see them with suspicion of laundering money from the firm. Being in stressed and struggling lonely, entrepreneurs are obviously vulnerable.

Many take risk of giving the advance in the hope of getting a large sum. Unfortunately, many entrepreneurs have lost a huge sum of money in their hunt for fortune.

The greater damage will be when an entrepreneur diverts his attention to chase this route and keep away from immediate tasks.  Lack of credible proposal may prompt recovery action leading to the collapse of the business and destruction of enterprise value.

How to deal with this situation?

If anyone offers a deal which is cheaper than a bank loan, it is to be examined thoroughly before committing. We have not still come across a charity extending helping hand to distressed businesses.

Entrepreneurs should desist from the temptation to seek quick money and allow them to be drifted away from reality. It is nothing but a distraction to find a viable solution within their reach and exacerbating the distress.

Keep your attention to immediate tasks such as talking to creditors and suppliers.

Many a time we falsely blame the absence of money for our distress. However, the fact is that most of the reasons for distress lie elsewhere and pumping more money won’t solve the problem.

Review the business strategy with the support of professional advisors. With professional assistance, you can build a new roadmap and lower the risk to sustainability.  When an outsider is roped in, fresh scrutiny will open the mind to explore alternatives.

Distressed entities require better policy support:

MSMEs need better implementation of the law to assist entrepreneurs to undertake course correction.  Unfortunately, half-hearted implementation of regulations to support distressed entities in India is preventing entrepreneurs from taking an orderly path to turnaround. This will naturally make them fall prey to unscrupulous elements.

The Insolvency and Bankruptcy code needs to be made universal.  The option of restructuring of loans should be enforced upon all the banks(public/private) and NBFCs.

In the present era of globalization, the vulnerability for risks is unlikely to recede rather likely to go up. Thus a stable policy environment is needed to support the turnaround of distressed entities. Also tagging prejudice of criminality with distress situation must end.

Conclusion:

Entrepreneurs in distress should appreciate that there are no short cuts to come out of it. Recovery from distress is an orderly process and time consuming requiring one to review in entirety and draw a new strategy.

 By

Anil Kumar Shetty, Founder, SME Advisors