Basics of accessing Finance for Tourism enterprises

An entrepreneur requires finance at every stage of the business life cycle. At the start-up stage, at the growth stage and at the expansion stage. However, entrepreneurs struggle with accessing finance. Many entrepreneurs do not know what financial products are available, what is needed to qualify for financing or how to become credit ready. This video provides an overview of the types of financial products available in the market. Explains what a lender looks for while financing and offers suggestions to MSMEs engaged in the tourism sector in North East India on the types of financial institutions and government schemes available in the region. Let's first understand the different types of financial products that exist and why enterprises need them. Term Loans Term Loans cater to investments in the business that are often one-time costs. Such loans cover purchase of assets whose value is realized by the business over a longer period of time. They have to be repaid over a longer tenure and hence have a lower interest rate. These loans are funded by financial institutions with a high-risk appetite. Working capital loans. These loans are used for financing recurrent costs. They are also used to meet short-term funding requirements to cover immediate expenses that may arise due to emergencies like COVID-19. Such loans cover short-term operational expenses, whose value can be realized by the business in less than or equal to a month. Since working capital loans are used to manage cash flows in the short term, they have a higher interest rate. They are funded by financial institutions with a low-risk appetite. Equity This is the investment by founders, owners or shareholders in the enterprise. It is used for investing in products or services that are new and high risk. For example, for funding development of a prototype of a product or a service. They are typically long term investments with investors willing to settle for zero or low returns in the short to medium term. They are funded by financial institutions or investors with a high risk appetite. The selection of financial product, term loan, working capital or equity should be determined by the purpose for which the financing will be used. There are different types of financing institutions in North East India. Rural banks, public sector banks, private sector banks, small finance banks and government development financial institutions which offer term loans and working capital loans. Equity investors who provide long term investments. Incubators who focus on startups and provide them seed funding and access to investors. When looking for finance, also explore government schemes that are available for your enterprise. Some government schemes offer easier payment terms, such as subsidized interest rates, and some others provide access to loans without collateral. Central and state governments have several schemes for MSMEs that facilitate access to finance. There are also schemes catering to COVID-19. More information on government schemes is available on online portals. What is needed to qualify for financing? Before applying for finance, an enterprise must have the necessary documentation, registrations and compliances. While some registrations are required by all businesses for recognition as an MSME and access to finance like Udyam Registration, Shops and Establishment Registration. GST registration. Some other registrations are required or are desirable to have and depend on the nature of business. For example, accommodation units require FSSAI registration if food is being served or packed food is being sold to customers. Tour operators require a tour operator license and the crafts and souvenirs businesses could benefit from the handloom mark or the artisan card. The lender also looks into the borrower's credit history and ability to repay the loan on time. One indicator used for this purpose is the credit score, given by credit rating agencies. Using your PAN card number, you can check your credit score at any time by going to websites like SIDBI's MSME Saksham, as well as websites of private sector organisations like Paisa Bazaar and Bajaj Finance. Refrain from checking your score unnecessarily, since it can impact your credit score. Credit score ranges from 300 to 900. Higher the credit score, better are the chances of getting a loan. Generally, credit score should be above 650. To maintain a good credit score, you must repay all loans, credit card dues on time. If you have provided guarantee as a third party for a loan taken by a family member or a friend, ensure that the borrower does not default on loans. Refrain from applying for a loan when you know your proposal is not sanctionable, as rejections also have a negative effect on your credit score. When applying for finance, you will need a clear description of the purpose of applying for finance. Details on the product or service offerings of the business, the business team and estimated budgets. This is called your concept or business plan. It justifies the investment and clarifies why the additional funds make good business sense. You can get help from the local chartered accountants or similar professionals to put this together. Finance is the fuel to accelerate MSME growth and performance. To summarize, In order to garner financial support, Number 1. Ensure requirements for enterprise documentation, registrations and compliances are met. Number 2. Maintain a good credit score. Number 3. Prepare a viable business plan. Number 4. Learn about available sources of finance and government schemes in your region. Number 5. Apply for finance at relevant institutions.