Rising Borrowing Costs Push SMEs to Sell Ownership Stakes: Empowering SMEs -Navigating Financial Challenges Together.

As rising borrowing costs reshape the landscape for small businesses in India, innovative strategies like selling ownership stakes are becoming essential. Discover how SMEs are adapting and thriving in these challenging times with support from Syndicate Capital.

Current Economic Climate

In India, small and medium enterprises (SMEs) are increasingly selling ownership stakes as a response to the financial pressures stemming from rising interest rates. The Reserve Bank of India (RBI) has implemented substantial rate hikes, increasing the repo rate by 90 basis points since May. This increase has led to a significant rise in loan rates, exacerbating the challenges faced by SMEs already struggling with high raw material costs and reduced demand due to the pandemic and geopolitical tensions. For instance, Neetee Clothing, a small apparel manufacturer, has cut its working capital loan by 80%, relying heavily on cash reserves, which may not be sustainable as they approach peak season in October-November.

Selling Ownership Stakes

To navigate these financial challenges, many small business owners are opting to sell equity stakes. This strategy allows them to raise crucial capital without incurring additional debt, thus maintaining liquidity while managing high borrowing costs. Selling ownership stakes can provide immediate funds necessary for operational needs, such as purchasing raw materials or addressing cash flow shortages during lean periods.

Alternative Financing Options

In addition to selling stakes, SMEs are exploring various financing options to alleviate the impact of high interest rates:

• MSME Loans: Government-backed loans under the Micro, Small, and Medium Enterprises (MSME) scheme offer favorable terms, with interest rates starting around 7.65% p.a. These loans are vital for sustaining operations and funding growth.
• Seller Financing: This method enables sellers to finance buyers at potentially lower interest rates than traditional bank loans, easing the financial burden on new owners while facilitating business transfers.
• Cash Reserves: Businesses are encouraged to build cash reserves to cushion against future economic shocks. Higher interest rates on savings accounts can bolster their financial position.

Furthermore, Finance Minister Nirmala Sitharaman has announced a new credit guarantee scheme aimed at supporting MSMEs by facilitating term loans for machinery purchases without requiring collateral or third-party guarantees. This initiative is part of a broader effort to enhance bank credit availability for MSMEs during challenging financial periods.

Key Highlights of the Announcement

• Credit Guarantee Scheme: The scheme will provide guarantees of up to ?100 crore to MSMEs, enabling them to secure loans for essential machinery and equipment without collateral.
• Support During Financial Stress: A new mechanism will ensure that MSMEs can access continued bank credit even during financial stress, particularly when classified under the Special Mention Account (SMA) due to temporary difficulties.
• Improved Bank Assessments: The Finance Minister emphasized the need for banks to enhance their assessment and financing capabilities for MSMEs, which have faced criticism for rigid lending practices and complicated grievance redressal processes.

Challenges Faced by MSMEs

Experts, including Anil Bhardwaj, Secretary General of the Federation of Indian Micro and Small & Medium Enterprises, highlight that serving MSME customers requires a deeper understanding of their unique ecosystem. Currently, MSMEs face a staggering credit gap of $530 billion, with only 14% of the 63 million small businesses in India having access to credit, as reported by investment bank Avendus Capital.

Syndicate Capital's Role

Syndicate Capital, an asset management firm, specializes in supporting small businesses through asset management and addressing special situations. By providing strategic financial solutions, Syndicate Capital helps businesses optimize their asset management and navigate the complexities of the current economic landscape.

Conclusion

The combination of high interest rates and economic uncertainty is prompting small businesses in India to adopt innovative strategies, including selling ownership stakes and seeking alternative financing. As these enterprises navigate the challenges posed by rising costs and fluctuating demand, the expertise and support from Syndicate Capital will be vital for their survival and growth in this evolving environment.