Beyond the Banks

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Beyond the Banks

There are alternate sources of financing apart from the traditional bank financing that could help businesses to overcome the challenges such as faced by the recent credit crunch.


Having experienced the liquidity crunch of 2010 and the credit crunch of 2016, businesses in Nepal have realised the problems of relying only on traditional banking for financing. Following the severe cash crunch in the banking system recently, businesses in the country are caught between a rock and a hard place as they are unable to get the much-needed cash for business financing.

"One of our clients told me that he wanted to stockpile his products for the harvesting season, but he couldn't, due to the lack of finance," shares Upendra Poudyal, former president of Nepal Bankers' Association and the then CEO of NMB Bank.  

Some industries and businesses have been compelled to postpone their expansion plans due to the high interest rates following the credit crunch. Similarly, many businesses have lowered their production capacity. The policy intervention by Nepal Rastra Bank (NRB) last month has eased the situation to some extent, but many businesses still do not have the much needed cash to move forward. Though large-scale businesses have other options to finance their business expansion plans, the situation is difficult for the SMEs and startups.

However, several innovative possibilities have been growing rapidly with the advent of the Internet, social media and online platforms. The distress, though it's challenging, can be an opportunity for entrepreneurs to roll up their sleeves, get out of their comfort zones and start looking for other possible financial supports.  

Here are some alternate ways of businesses financing that go beyond the traditional way of bank financing and discover new sources. 

Extension of Supplier's Credit (Trade Credit)
An option during a distressed situation can be asking the supplier for longer credits. In this process, a trader can buy the goods but pay the supplier at a later date. For instance, if the trader has one month to pay the supplier after taking the goods, they can make it two months with mutual understanding. It is actually a credit which one company gives to another company for purchasing its goods or service. 

Usance Bill
Another way for businesses to ease the loan pressure is the suppliers' credit. As per former NBA president Poudyal, under the Usance basis the banks provide buyer of goods with a timeframe of three months for the payment of Letter of Credit (LC). Whereas, on the sight basis, the LC payments needs to be made immediately after the goods are shipped. "Currently, NRB has a provision of clearing the payment after 120 days for LC payments. If the NRB extends the period of usance for LC payments to 150 or 180 days, businesses will have some level of comfort," observes Poudyal.

P2P Lending 
Peer-to-Peer lending is a method of debt financing which allows businesses to borrow and lend money without the involvement of any authorised financial institution as a third party. When the lender gives the loan to the borrower, the former gets interest which can sometimes be a source of income. P2P allows the borrower access to financing which is complicated in formal and traditional methods of loan.  There is risk in P2P lending as it is unpredictable if the borrower will repay the loan. Similarly, as there is no involvement of an authorised institution as a third party, the interest charged in P2P lending may not be uniform and may be higher than banks' interest rates. However, P2P lending has been successful in many developed countries including England and New Zealand. In the US, however, it's been gaining attention only recently.  Websites such as Kiva, Lending Club and Prosper are promoting P2P lending. 

Asking Customers for Advance 
Trust and good relation with the customers is one of the basic requirements to get financing through this process. In this process, the company takes advance payments from its customers for its product or service and, if required, provide discounts in return. During the liquidity crisis of 2010, when Nepal Rastra Bank tightened the real estate loans, some housing companies in Nepal applied this method to meet their financing needs. They asked their clients to take loans from banks and provide that money to the real estate company, assuring them to pay a higher interest rate than that of the banks. This helped the businessmen to finance their projects and develop good personal relations with their clients. Though this method cannot be applied to all customers, selected clients with whom the businesses deal regularly can be engaged in this financing process. 

Crowd Funding
This method of financing has been exponentially growing in the developed countries. The donation, collection and investment are done through online platforms. In this way of financing, the entrepreneurs need to ask the mass for contribution. So, receiving investment from this platform requires the entrepreneurs to bring a convincing story about their services and products. It is basically an online version of fundraising where entrepreneurs with unique business ideas have to convince the masses for their small money contributions. 

Special Purpose Vehicle (SPV)
SPV is different from the normal lending processes. SPV is for a specific purpose. It is a platform which provides finance to entrepreneurs without the need for collateral. The SPVs are separate institutions (often subsidiary companies) which borrow loans from banks. Then they invest the money in the form of debt. The SPVs not only take the risk of the debt but also invest their time to provide guidance and mentorship to entrepreneurs. Though there are no policies for the operation of SPVs in Nepal, its implementation in the country can be a highly beneficial financing option for SMEs and startups. 

Angel Investment, Venture Funding, and Private Equity
These methods have been gradually gaining popularity in Nepal. Though there are no policies regarding these alternative financing methods, many companies and individuals have been helping the startups by giving these options to them. Business Oxygen, Dolma Fund, iCapital, True North Associates, Biruwa Advisors  are some companies which are giving growth opportunities to startups.

In angel investment, a startup even in the 'idea stage' can approach the angel investors also known as business angel for finance. After carefully observing the criterias including the idea, team and the product's market potential, the angel investors decide whether to help the startup. Usually, they help the startups in their first stage. More often than not, the angel investors give enough time to the startups to grow and start making profit.

In venture funding, the SMEs and startups can approach the investors for financing for the company's long-term growth. The investors - if they find the idea worth investing, provide them finance in exchange of equity of the company. This method can be chosen when the startups are in their early stage. 

Private equity on the other hand is for companies in the growing stage. It is an option for companies which have earned certain amount of revenue and are not able to get into IPOs or have access to the capital market. Private equity firms, in exchange of the equity, provide entrepreneurs with capital and also techniques to upskill them to grow financially. 

Besides all these, an immediate option to comfort a situation of distress is refinancing. In refinancing, the government has to play an active role.  "For an example, a cement industry which has substituted import should be provided re-financing by the NRB and the government,” shares Poudyal.  Poudyal views that if the bank's loan to the productive sector is 12-13 percent now, half of that amount can be made available as refinancing. The government will provide funds to the banks at a certain rate and the banks have to add capital expenditure to it and give loan. "The borrowing cost in refinancing is less," says Poudyal.

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