By Sunita Abraham
Mint, New Delhi
WWR Article Summary (tl;dr) Several business owners from India share their up-close and personal experiences dealing with debt. What works, what doesn’t and what to look out for.
Mint, New Delhi
Debt is a part of most businesses. And just as too much debt can derail a household’s finances, it can have an equally debilitating effect on a business too.
The solution then is not to stay away from debt completely but to find the right balance. If too much debt can be bad for a business, insufficient capital to grow and expand, too, can be equally detrimental to the success of a business venture.
What are the challenges in managing debt in small businesses? Sunita Abraham spoke to three entrepreneurs to understand more about how they deal with debt in their business and the lessons they would like to pass on to others.
Harish Kalmadi, 49, Hyderabad
Pause, control spiralling debt, consolidate and then expand
Harish Kalmadi started his venture that makes commercial kitchen equipment when he was just 21 years old. He began with his own savings and continued expanding by reinvesting the profits.
But the nature of the industry was such that over time Kalmadi found it difficult to collect full payment from clients, even for completed projects. This ate into the capital invested in the business and affected his ability to take on more projects. Debt was the way to bridge this gap for working capital. “For small businesses, it is not easy to access bank financing without providing collateral in the form of fixed assets,” said Kalmadi.
Over time, servicing the loans that he has taken to expand and run the business has taken a large chunk of the revenues earned.
And in periods of lean business, he has had to resort to informal funding sources to meet his obligations. Even when there is sufficient business, the overwhelming debt may be eating into the profits and leaving very little for re-investing into the business.
In such a situation, Kalamdi recommends pausing to regroup. “You have to deal with it before it snowballs into a much bigger problem. If a bank decides to commence action for recovery then you may end up losing your assets for much less than their worth.”
A better option is for the borrower to sell the assets themselves, so that they can at least be sure of getting the best price possible, and settle the debt. “Creating assets is not easy, but creating liabilities is very easy. Selling assets is the last resort to meet obligations,” said Kalmadi of the stark options that entrepreneurs have to deal with sometimes.
“Banks should assess each loan account on its merits before taking recovery action. The focus should be on providing financial support for a business to get back on its feet which will benefit both parties,” said Kalmadi of what he thinks will work for building entrepreneurship. It is wrong to doubt the intent of every borrower, he feels.
“A business comes to a stage where further growth and expansion will depend upon its ability to build scale. For that, it needs access to large amount of funds and committing to this comes with its own risks,” said Kalmadi. His experience with managing debt in his business makes him hesitant to take this next step.
If you march to the tune of entrepreneurship, then things like debt is not going to stop you. Have good knowledge of the business and a well-thought out business model. It is always good to be conservative with revenue estimates and err on the higher side for expenses. Growing too big too fast may not be a good idea. Personal expenses and lifestyles too change as businesses grow but let that not become a burden on the business.
Sudha Amarnath, Ranipet in Tamil Nadu
Be conservative and prioritize repayment
Sudha Amarnath took a loan to build the factory and buy machinery when she shifted her iron and steel forging unit to Ranipet in Tamil Nadu in 2014 from the outskirts of Bengaluru from where it had been run for a long time. The loan from the Tamil Nadu Industry Investment Corporation (TIIC) was the primary source of funds and Sudha was determined to service the loan from the business cash flows itself. “I always gave priority to the repayment of loan from TIIC from the monthly cash flows. The factory’s need for raw materials and the workers came next,” said Sudha. “By the 21st of every month, I make sure that the funds required to take care of these commitments are there so that there is no default,” she added.
While there are customers who delay payments even for years, the bane of all businesses, she is lucky to have clients built over the years who are prompt with their payments and she uses that to meet her commitments. Building such clients who you can depend upon is important for a business, she feels. To make sure that she does not fall short of funds, Sudha is conservative in her business plans so that she is able to manage the inflows and outflows of the business better in the time that she has the loan to service. “I pick up only as much raw materials as I need for my planned production and I manage my working capital so that I don’t have to resort to any overdraft or other credit facilities for that,”, she said.
Her conservatism also means that the business just makes adequate profits but that is a choice she has made and has no regrets. “My loan gets over at the end of this year. I am waiting to enjoy myself then,” said Sudha. She has always kept her personal commitments to the last. And her mantra to deal with the stress of managing the business alone? “I sit and cry to wash out the stress and then I am back to taking care of what needs to be done,” said Sudha, who took over the business in 2005 to keep the dream of her deceased husband alive. She is not averse to taking a loan to expand the business once the existing loan has been paid off and if the conditions are suitable. “I will run the business as long as I can and then find a suitable person to carry it on,” she said of her long-term plans.
Roy Ponodath, 56, Kochi
Have an alternative funding plan in place
A holiday in Varkalla, Kerala sowed the seeds of a resort in Roy Ponodath’s mind. It was his first foray into the hospitality sector but he was confident of making it work given his success with establishing and running a profitable civil contracting business. With an initial investment for buying the land from the two partners and a loan from the Kerala Finance Corporation, the construction commenced.
The first learning was the importance of having a detailed and robust plan for the project that goes into the minute details. “As we were constructing the resort, new ideas came up and we spent a lot of money on it. The final result was good but it took us off budget,” said Ponodath. He also points out to the need for being prepared for the unexpected.
In his own case, it was the NIPA virus scare and the floods in Kerala that kept away the foreign tourists that make up his clientele and this hit the revenues. “Be conservative with revenue estimates especially in the first couple of years of a new venture and have an alternative funding plan in place to take care of repayment obligations and overheads,” he advises. “My resort makes money only in the season, which is five months of the year. The rest of the year, it is just survival revenue. During these periods, servicing the loans was a stretch.” As the debt worries grew, Ponodath was neither able to focus on his existing business nor the new venture. That is when he decided to close out the debt by selling off some real estate investments and a personal loan. “Every business looks good before you get into it. It is only once you enter that you realize the nuances,” he said.
“Financial institutions need to be sensitive to conditions that may cause distress in the business which may be the reason why there may be a delay in servicing the loan. In my case, my contribution to the project was 67% and the financial institution contributed 33%. I have a greater interest in keeping it going. The hurry to declare a loan as NPA does not help anyone,” said Ponodath.
Ponodath has not let this experience sour him from the resort business though it has definitely made him wary of debt. For his next venture, he has gone with an equity model where the resort is being built from funds raised from buyers and he is confident that it will work.
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