Issues and Steps to Overcome Financial Challenge
The up-scaling of any business requires infusion of funds at periodic levels. The funds are pulse of any business. The First and Primary source of funding is Promoters equity (Self Contribution) and thereafter surplus amount generated by the business and retained in the business. Debt Funding is used in conjunction with promoters equity to ensurer a higher growth from business. It makes more sense to go for Debt Funding in the business models which has found themselves sustainable and scalable in various competitive scenario. Debt Funding if used judiciously can help to grow your business exponentially.
By judiciously we mean, that it is not just really “Money”. But it is the form of money that equally matters. Many of us sometimes commit common error in this regard on account of inherent characteristics of money which gives it a “fungible character”. Therefore the money can be used for whatever purpose due to this fungibility character. While money is fungible, the form of money is not ?
The form of money in the Debt Funding has a direct correlation between its proposed usage and returns to the lender.
To illustrate, generally the requirement of funds is of two types
- Undertaking any capex expenditure
Capex Expenditure involves e.g. expansion plan involving investment in Land, Building, Plant & Machinery, Technology etc. etc. This kind of investment in the business is more of permanent nature. The repayment of the debt funding amount in this case is highly dependent upon the profits or surplus generated by the business in exchange of constant usage of capex assets. Therefore, the Capex requires a long term debt funding to ensure its timely payback.
- Working capital investment
Working Capital investment e.g. increasing the level of inventories or extending credit lines to your debtors. This type of investment requirement in this case is revolving in nature. It is more liquid investment as against the former. This type of funding requirements is generally short term and can be reviewed and renewed by the lender on periodic basis.
Factors to Keep in Mind While Analyzing Your Funding Requirements
It is important to understand that while structuring any financial requirements, the promoters should carefully analyze not only the requirements of funds needed to kick-start any project but also consider suitable alignment of his monetary requirements into Long Term Funding versus Short Term Funding. Otherwise, it may lead to a scenario of Asset Liability Mis-match in the business.
The lenders do adopt a framework for assessment of the long term and short term funding requirements. On the basis of the business projections as submitted by any entrepreneur, the lenders carry out their assessment. In case, the short term funds raised in the business are diverted for building long term capex expenditure of the business. It may create sever challenges in timely servicing of your loan installment. Additionally, it may result in contraction or stagnation situation in the business as the lenders may find over-leverage situation in short term funding sources of the business and refuses grant of further working capital funds.
In such a case, the business misses the potential up-scaling opportunities by making a little investment in working capital funds. Likewise, the long term funds raised in the business and diverted to short term usages denote a poor financial management as it may lead to financial burden on the business undertaking on account of improper funds management.
A well disciplined financial system adopted by the lenders world wide puts a lot of restriction on the fungible character of money. While certain business may treat the same as fungible, the lenders essentially will not. This diversion in the approach can result in financial challenge in the operations of any enterprise.
The other issues for financial challenges in the company could be due to :
- Delay in Setting Up the Capex Expenditure and thereby its commissioning
- Non Absorption of Technology within a envisaged time
- Non movement of inventory (obsolete/rejection/pile-up etc. etc.)
- Slow Movement of Debtors (Litigation/denial or dispute)
- Others – competition, market, management, labour or otherwise
Steps to Overcome the Financial Challenges
There could be a variety of ways to address the situation of financial challenges in the business. It is important to identify the exact reasons which caused the financial challenge. The Lenders intervention if sought at the early stage can help to prevent the harm to a greater extent. The small business can approach for restructuring of their advance under RBI Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprise (MSMEs) issued on March 17, 2016 https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=10304&Mode=0
The other possible solutions to come out with the position of Financial Challenge
- Take-Over of Advances by other lenders generally NBFC in line with revised asset liability pattern
- Corporate Loan for the purpose of removing asset liability mis-match from other Bank /
- Small Tenure Ad-hoc Business Loan to address the temporary mis-match scenario.
- Equity Placement through Private Equity investment / IPO route
However, it is equally important to detect the financial challenge at early stage in all the scenario. The exact decision with regard to the financial challenges depends upon the stage of the business. Generally all business which are otherwise doing good, it is possible to bring back the business on the growth path provided timely diagnose to the problem is done.