Raj K Pathak

Connecting Entrepreneurs with Information,Knowledge & Networking

Solution to unemployment lies in promoting MSME sector

September 21st, 2014

In India one person out of three persons who is holding a graduation degree and above in the age group 15-29 years is found to be unemployed.(According to Labour Bureau’s Third Annual Employment & Unemployment Survey 2012-13).

Unemployment rate amongst illiterate youth is lower than educated youth. A comparison with the earlier report by labour bureau shows that the unemployment level has increased during 2012-2013 over 2011-2012.

While unemployment rate among illiterate youth is lowest with 3.7 per cent for the age group 15-29 years at all India level in 2012-2013, the unemployment rate in the same category was reported at 1.2 per cent in 2011-2012 report.

As stated in the report, the unemployment amongst the graduate youth that happened to be at 19.4 per cent in 2011-2012 increased to 32 per cent during 2012-2013.

Similarly, the unemployment rate amongst the educated youths reportedly increased with increase in their education level. (Amongst all age groups viz. 15-24 years, 18-29 years and 15-29 years).

As per Planning Commission of India about 10 million new youth are added every year to India’s unemployment population seeking employment.

There are hardly any jobs in Central/State governments.The large corporate has been having employment less growth over last since more than a decade.

So, only hope to absorb 10 million people that enter work force per annum lies with Micro,Small and Medium Enterprisies(MSME).

It  is therefore,imperative that MSME sector is promoted and supported to be able to be job creator for the country.Apart from being job creators for the country,MSME sector also ensures equitable and inclusive growth in the country.

As per MSME Minstry organised All India Census of MSME,2009, there are total of 26100797 MSME units in India, out of which only 1552491 ie 5.95% are registered units and 24548306 units are un-registered ie 94.05%.

These MSME units give employment to about 60 million workforce (45% of total workforce in India)  with 9.5 million in registered and 50.3 million in unregistred units.Out of registred units 28% are in manufacturing and 72% are in service sector.

The survey also came up with the findings that the major concerns of MSME entrepreneurs remain “lack of demand ” and “lack of working capital”.

Govt of India as well as state governments need to focus on strengthening of MSME sector before it’s too late.There are many schemes for development and promotion of MSME’s but due to lack of awareness, large number of MSME untis are unable to take benefits from the Govt.

Few things government need to focus upon are as under:

1-Make it easy for a unit to register  under MSME Act.Every state should make registraion of MSME possible through online registration.This will encourage more and more unregistered units to register and thus take advantage of Govt schemes which presently is available only to registered units.

2-Irresepective of various committees having recommeded “Easy flow of credit and availablity of credit at affordable price”  to MSME sector, it still remains a distant dream for large number of them.Only about 5% of MSME units are able to get funding from financial institutions.RBI has few guidelines but Banks shy away from obeying such guidelines.RBI should make some of its guidelines for MSME sector as “Mandatory” to bring some visible change.

3-MSME BRAND DEVELOPMENT FUND should be initiated to help create demand for thier products and services.

4-Media should be involved to attract youth towards entrepreneurship and self-employment.Youth needs to be job creator instead of job seeker.

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Raising Finance for your Business!!

September 5th, 2014

Finding a source of capital ie  finance to start or expansion of your business  can be a major challenge, particularly for a start-up entrepreneur.

Sadly, a great business is often only as good as its financing, and without the right kind, you may just end up flapping around like a turkey before ever getting the chance to soar like an eagle.

It’s crucial for start-up entrepreneur to develop a broad understanding of the different financing.

When it comes to funding a start-up or expansion of existing MSME business, there are two basic options: debt or equity financing.

Typically, an entrepreneur makes a plan that may appeal to VC- valuations, projections, etc. but the bank is more keen to see your P & L, projections based on past records, cash flow, etc.

Each has its advantages and drawbacks, so it’s important to know a bit about both so you can make the best decision for financing your business.

Debt Financing

Debt financing involves borrowing money, typically in the form of a loan from a bank or other financial institution or from commercial finance companies, to fund your business.

Getting a business loan generally requires good credit and solid financials, as well as collateral for larger loans.

Many MSME entrepreneurs and specially start-ups are afraid to take on debt because they fear they may not have the cash flow to repay the debt (plus interest) in a timely fashion.

Many  may be concerned that they don’t have the credit-worthiness to get a bank loan, and so don’t want to even bother applying. Many more think they would manage to raise equity funding for their project and thus remain away from even learning a little about debt financing.

But debt financing has some definite advantages that make it an option worth considering for any MSME owner or start-up entrepreneur.

First and foremost, unlike with equity financing, debt financing allows you to retain control of your business, as ownership stays fully in your hands.

You may have to back up a loan with collateral, so if you default you may lose certain tangible assets, but you won’t lose creative and strategic control of your business.

However now with CGTMSE scheme wherein bank loan for MSME including for a start-up enterprise upto Rs 1 Crore is available, raising debt financing has certainly many attractions.

It’s also worth bearing in mind that interest paid on loans is tax deductible, softening the blow of repayment somewhat.

Equity Financing

Equity financing involves bringing in investors or partners who provide capital in exchange for a share of ownership of the business.

These investors or partners generally invest because they expect to make a profit when the business becomes successful.

Unlike a loan, if you don’t make a profit, you usually aren’t required to pay them back. The absence of monthly loan payments can free up significant working capital for the business.

Many start-ups and MSME entrepreneur are drawn to equity financing because, while investors or partners will only provide equity if they have faith in the earning power of your business, you don’t necessarily need the past financial history that is required for a loan.

This can be a crucial point especially for those just starting a business without the two or three years of financials most banks look at.

The cost of these benefits is that you no longer retain sole control of your business.

This means that not only will your investors be entitled to a share of profits, but they also have a say in the running of your business and the direction it’s headed.

This may not seem like a problem at the beginning when you need cash, but can sometimes lead to conflict further down the road.

On the other hand, a strong, smart partner may be an asset to your business; especially if you find someone who is a good compliment to yourself.

If you’re the creative, visionary type, you may benefit from the balancing influence of a partner who is grounded and pennywise.

The Bottom Line

Because each type of financing has its own appeal, businesses often take advantage of both debt and equity financing, utilizing each to its best advantage.

Look at the benefits of each to see which may most help your business, and compare typical debt-to-equity ratios for other businesses in your industry when deciding what type of financing to seek.