By Shrikant Goyal, Co-Founding Member & Managing Partner, GETFIVE
SMEs, small and medium-scale businesses, have been pivotal in accelerating the growth of the Indian economy and opening up employment opportunities. Their growth, though, has been stigmatized by challenges in raising funds.
The lack of appropriate bookkeeping and an attractive bottom line limits the SMEs’ access to traditional financing options such as bank loans. It leaves the SMEs to look for alternate means of financing, such as debt which often comes with questionable terms, or postpone their growth plans to the future. In either case, long-term growth is impacted.
What could be a win-win solution? Private Equity (PE)??
The predicament over PE
Private Equity occurs mainly via the venture capital route, but SMEs often feel certain predicaments when considering onboarding PE investors. They are worried about the loss of control and the need to report on every activity of the business regularly, and they fear the business decisions will no longer be theirs.
While the fears are well founded, let us change the perspective. Debt is generally a choice for short-term financing. Debt as the only tool to fuel growth may not be a wise option as it impacts the bottom line and has to be paid back irrespective of the business performance. For sustained long-term growth, equity investment is the way to go.
Private equity investors, in factual terms, are the SME’s business partners and have a vested interest in the growth of their business and hence will work with them to achieve the objective. They enable SMEs to become efficient without stressing their debt-to-equity ratio. They understand that the business owner knows the business best and seldom meddles with the running of the company. To ensure they take advantage of opportunities in the market, SMEs should consider PE investments.
Furthermore, opting for PE investment brings with it a lot more than financial support. Let us look at some of the gives of this arrangement.
Network and expertise
Private equity investors bring business expertise and an extensive business network. SMEs can gain from business mentoring from their PE partners and gain new business prospects or better suppliers through access to their network. Hence, having a PE onboard can help the SME’s business efficiency and sales growth.
Understand the business due diligence.
SMEs have to level up their financial game to attract a PE. It requires due diligence on the SME part as well as the PE investor. The process involves incorporating accounting standards, MIS reporting, and more.
As an SME undergoes the due diligence process, it understands the strategic benefits and drawbacks of the business and can work on the same. This due diligence also helps the PE investor familiarize themselves with the business and gain an understanding of the operations and finances. It positions the PE investor well to work with the SME to develop a clear vision and work in the direction of growth.
Increased brand visibility.
When an SME undertakes the PE route, it is assumed that they have the financial capacity, products, management, and strength to attract investors. It gains the SME a positive sentiment from the market, strengthening their position as an investment-worthy firm and further adding to the consumers’ confidence.
Additionally, if the PE investor is a well-recognized name in the industry, the SME can gain from the investor’s brand equity and can add to the SME’s marketing muscle.
Efficiency in liquidity and working capital
PE investors bring capital to the business, which helps fund the expansion initiatives. However, through expansion initiatives, SMEs retain their hold on their liquidity and working capital.
The SMEs now have the additional benefit of the PE investor’s financial expertise that helps increase efficiency in improving the working capital ratio, enabling the SMEs to sustain their business in the market.
It’s time to rethink PE as an option for financing. The dilemma around onboarding PE investors, such as losing control and increased interventions, may need a revisit. PE investors bring much more than finances to help an SME chart its growth path. To make the most of PE funding, SMEs should hire an expert agency that matches their requirements with PE investors and eliminates the ifs and buts!