What Is Corporate Finance and How Is It Relevant To SMEs?

A business needs money to start operations as well as to sustain its activities and grow. It is important, therefore, that every business owner understands corporate finance, which includes aspects of how best to get this money and in what ways should it be deployed.

During the course of the business operations, the business executives and the owners have to decide how much capital would they bring in themselves and how much debt would they be going to borrow. Also, once the business has started running, they have to consider taking debt or infusing equity to grow the operations. This is all part of corporate finance.

Those involved in corporate finance consider the need of funding, best ways to get the funds and its optimum deployment to get the best return. These would also include mergers and acquisition to expand the business.

All businesses, irrespective of size, need to grow to provide value to their shareholders. Hence, corporate finance matters to all types of entities whether proprietary, joint venture, limited liability partnership or a company.

Let us look at how corporate finance is relevant to small and medium enterprises (SMEs).

What Are SMEs?

The government’s definition of a small enterprise is a business where the investment in plant and machinery or equipment is not more than Rs 10 crore and annual turnover is less than Rs 50 crore. Similarly, medium enterprises are the ones where the investment on plant and machinery is less than Rs 50 crore and turnover is less than Rs 250 crore.

The government keeps on updating this definition and even when an enterprise crosses this limit it keeps on getting the benefits of SMEs for a limited time.

SMEs And Corporate Finance

Whether a firm is a major corporation or an SME, it needs financial resources to grow. All initiatives or plans for expansion require funding. To get funds a business has two options:

• Equity from shareholders;
• Debt from banks or non-banking finance companies (NBFCs) or issuing debt instruments such as debentures.

A smart corporate finance would balance a mix of equity and debt to ensure that neither the company is highly leveraged, nor is its equity too diluted.

SMEs typically have limited access to capital as their shareholder base is small. So, to run or grow the business they would need regular access to debt.

Depending on how urgently they need money and what assets they own, small business owners have a variety of possibilities from which they pick what is best suited for them. Many financial institutions offer business loans to SMEs.

Depending on the loan amount, banks and certain NBFCs have tailored loan solutions. So, one can choose loans in accordance with their needs if they require a business loan. Unlike banks, NBFC loans offer flexible terms and a speedy process for receiving the money into the account. The procedure is straightforward and can be finished online without visiting any actual branches, especially in the case of small, unsecured loans.

Those involved in corporate finance activities of an SME would see with all the options of taking debt and then decide which one to opt for depending on the following:

• The speed at which the fund is needed
• The minimum amount that needs to be raised
• The rate of interest that various lenders will be charging
• The documentation required by lenders
• The security or mortgage wanted by lenders

Also, if an SME doesn't have any assets, their owners can choose to run their firm with items like a gold loan or even a personal loan. Or, they can opt for unsecured business loans that many banks and NBFCs provide at competitive interest rates and a flexible repayment duration.

Conclusion

Corporate finance would entail having an understanding and then analysing all the options of financing a business and then choosing the one that is best suited for an SME. It may be a mix of equity or debt.

Small business loans from reputable NBFCs, like IIFL Finance, with affordable interest rates can help SMEs finance the expansion of their companies.

The loan packages offered by IIFL Finance can be accessed online with only a minimal amount of paperwork and are tailored to various company finance requirements. IIFL Finance offers up to Rs 30 lakh in loans to businesses that have been operating for minimum two years, have a positive net worth and a good repayment history. The company also provides hassle-free loans of up to Rs 10 crore at affordable interest rates to SMEs against many assets including constructed residential or commercial properties and plot of land.