Raising Red Flags – The pitfalls in starting a Business Venture

- Bhavani M (Executive)

Today 90% of the start-ups fail even before celebrating their first anniversary. Many entrepreneurs ask themselves, why an idea that seemed realistic at the initiation did not yield results in a realistic world. The answer is, in a real-world the perfect market as envisaged in economics does not exist.

For a first-generation entrepreneur, starting a day is like playing a game of chess where the opponents can be in the form of vendors, buyers, statutory regulators and many more. The journey can be difficult; full of camouflaged pitfalls in the form of appealing ventures. Of all such hidden traps, here are some significant ones which can lead the enterprise to collapse before commencing the business.

"Look before you leap."
Market research, a notable segment of the business, is always undermined. Many a business fails are happening due to lack of actual insight on the market scenario. Financial and technical skills combined cannot corner the markets without fundamental market research. Watch out for the sectoral developments and statutory reforms which can alter the game plan. Investing adequate time in understanding the market supply-chain can safeguard the business in the turbulent times.

"Put the cart before the horse."
Have a detailed and viable business proposal before venturing towards investors and banks. It is never safe to play a safe bet at the time of negotiations. Plan more than one proposal to understand diverse market scenarios. Take the guidance of financial experts where necessitated. Having a grasp on the start point to the finish line of the business will yield brownie points when in time of Q&A session. And always be receptive to the investor's observations.

"Fish where the fish is."
Forward and backward integration must be the deciding factors for determining the location of the business. Starting a business must incorporate a plethora of elements like raw material availability, the local markets, labor resources and infrastructure. The connecting factor of these elements is the logistics which can make or break the deal. The elaborated components are a few of the determinants to be considered by the entrepreneur to sweeten the deal with the investors and begin his journey successfully.



Reasons for Stress in Manufacturing Enterprises

- Arjun Reddy (Executive)

There are various factors contributing to the growth of country’s economy, but one of the major contributors is the MSME sector. Today setting up of an establishment under MSME Act has become easy due to the introduction of numerous encouraging policies by Central and State Governments.

Simultaneously, there is also another face in the MSME sector i.e. Challenges faced by the firms to sustain in the ecology. My year-long experience with stressed Micro and Small manufacturing enterprises at Telangana Industrial Health Clinic Ltd revealed some interesting rationale to share.

Typically, the significant reason for these industries to fall sick is due to ineffective marketing of the product which leads to lowering of the demand for the products in the vast competitive market. Financial loss alone is not the cause for stress/sickness in the enterprise.

Several non-financial reasons like: Raw Material supply, delayed approvals from regulatory authorities, lack of financial discipline and implementation of unpredicted external policies prevent the entrepreneurs to scale up the business.

A few of the major reasons for causing stress in manufacturing enterprises are:

  • Zero/Low credit period for acquiring raw material
  • Non-renewal of working capital in time
  • Lack of marketing awareness to create enough demand for the product
  • A huge gap between projections and implementation of the project leading to stagnancy and confusion
  • Unorganised structure of operating the enterprise
  • The blind approach by following their competitors in pricing
  • Poor packaging

Banks and financial institutions have little time to devote attention to enterprise-level issues. A preventive and curative institution like ours has the full potential to address the issues of sustainability. This will be the future of the investment horizon.



TIHCL & Co-financing

- Divya Ch (Executive)

Co-financing- A mode of financing in which the different lenders agree to fund under the same security packages but may have different interest rates, repayment profiles, and terms. In this, all the Financial Institutions underwrite the creditworthiness of the client individually. All financial Institutions exchange information.

TIHCL’s Co-financing for MSMEs

TIHCL revives and rehabilitates the sick and incipiently sick micro and small manufacturing enterprises in the State. Through our diagnostic study, the sickness faced by an enterprise is identified and industrial health clinic offers remedy by supporting them with a revival package and handholding process

Due to better information on the client, the scope for adverse selection is eliminated because of TIHCL’s double-check on the client detail. The lending process through co-financing model better assessment of the business model is anticipated

Clients, where the entrepreneur requires loan enhancement for comfortable and continuous operations, the additional margin money required by the bank form the entrepreneur, TIHCL, may grant a soft loan by accepting the pari-passu charge from the primary lender.

How are they different from?

  • 1. Consortium Banking
  • 2. Multiple Banking

1. Consortium Leader (Lead Bank) - Consortium bankers allow any one lender to provide a large loan while maintaining a more prudent and manageable credit exposure where the associated risks are shared with other lenders. Each lender's liability is limited to their respective share of the loan interest. In syndication except for the collateral requirements, terms are uniform among lenders. Collateral assignments are assigned to different assets of the borrower for each lender. There will be only one loan agreement for the entire syndicate. A lead financial institution (Syndicate Agent) will coordinate the transaction.

2. Multiple Banking- A banking arrangement where a borrower avails finance independently from more than one bank. Thus, there will be no contractual relationship between various bankers of such borrower unless the bankers assess the loan under working capital need and seek right on the stock & receivables. In such a scenario the second lender must seek a NOC and Pari Pasu letter from the 1st Lender to claim the right on the stock & receivables. Generally, in multiple banking, the customer provides separate collaterals to the banks.



Can China crisis be a boon for Indian Clusters?

- Bharath Ram (V.P)

In the recent budget, the finance minister has laid a red carpet for Cluster development. Cluster development has been among the key focuses by the government as SMEs are expected to generate jobs.

With the current slowdown in China, India can benefit from the opportunities in global trade and boosting entrepreneurship. Clusters can empower small businesses and create good rural employment. The current SME’s are not able to match the global quality standards. There is a huge asymmetry between micro and large businesses houses. The large business houses are keen to support SME subject to the quality of the product.

One of the reasons neighbouring country China being very competitive is that it can offer the same product from the cheapest quality to the best quality in the world due to adaptability of the technology faster in SME.

In the current scenario of crisis in China where the production capacity hardly 10% of the country capacity and many countries are dependent on China. This is the right time for India to establish itself as an alternative to China. Government need to develop Clusters in all states.

Rather than monitoring at macro level Govt., should deploy various nodal agencies in implementing the cluster and making them sustain them for at least 10 years. The cluster can create huge employment in rural with minimal CAPEX requirement.

Government needs to analyse on which products other countries are dependent on China and develop industries on those lines. Merely sanction of subsidies or grants doesn’t make an enterprise successful. Creating the environment for the SME makes them globally competitive.

With the current parameters of clusters must be amended as no major clusters were developed with the current norms.