Many of these unregistered smaller businesses are doing solid business and are always on the hunt for capital to expand, according to Bangalore-headquartered Vistaar Financial Services that lends growth capital to the country’s under-served smaller enterprises.
The business opportunity for small enterprise financing in India is worth INR275,000 crore, said Vistaar's co-founders Brahmanand Hegde and Ramakrishna Nishtala
The company recently raised INR40 crore in a series B round of financing from new investors. This will be used to expand operations beyond its home turf, which is the southern Karnataka and Tamilnadu states, and enter the western states of Maharashtra, Gujarat and Madhya Pradesh. The company is eyeing an outstanding portfolio of INR1, 600 crore in four years, said the co-founders. Excerpts from the interview:
On Modus Operandi…
An entrepreneur can visit our branch office. Alternatively, our branch could reache out to a entrepreneur either through a referral or through cold calls.
Details pertaining to number of years in business, type of business, ability to provide collateral (larger sized loans are collateralized) are recorded. A detailed credit assessment follows when our credit manager visits the enterprise. We do reference checks with suppliers and neighbors; carry out credit bureau checks to find out the entrepreneur’s loan history and track record.
We do not give loans to start-ups. We give out funds for expansion and a one has to be in business for at least three years to borrow from us.
On assessing financials in the absence of documents…
We have our own credit methodology to assess a company’s financial position. We study purchasing patterns, sales and margins if the business in question is a kirana store for example. A template is created from the bank of knowledge which serves as the basis for evaluating another firm in the similar space.
We also create databases of customers and suppliers for specific sectors. For instance, when assessing a power loom’s finances, we contact master weavers who supply yarn to power looms for a reference check on the firm in question. We also talk to customers.
On product offerings…
There are two loan products, targeting 26 million micro, small and midsize enterprises. The first is for loans worth INR 60,000 and below secured through hypothecation of goods. The second, for loans between INR60,000 and INR 20 lakh, secured through collateral such as private or business property.
Customer segments such as power looms, kirana stores, dairy farmers and brick kilns, account for a significant amount of our portfolio.
On challenges in their business…
Establishing the business model, assessing customers, understanding each sector are all things we have done in previous roles. But implementing the same in a startup, including convincing lenders to give us funds, was a challenge.
We have attained a reasonable degree of stability and equity base now. A set of lenders are happy with us. Scaling up here onwards is another set of challenges.
There are multiple players providing different products. None of them are focused on micro, small and medium enterprises (MSMEs).
We expect more competition in this space. Competitors will help us improve operations. The opportunity is huge given the market size is about INR275,000 crore. There is space for 10 firms targeting MSMEs.
On loan defaults…
We have not had significant defaults. Just 0.1 percent of the portfolio has not been paid. We expect to recover that. Recovery will begin with a discussion with customers. We can also initiate appropriate legal means.
Advice to entrepreneurs…
Entrepreneurs should not follow the heard. One must be very clear on the unique customer segment; specific market needs they are addressing; and build a business model around that. Questions such as scalability of that business; can it attract investor equity should be addressed.
A business venture should strike a balance between keeping costs under control and laying the foundation to scale the business in five years. A firm should put in place a good second level team earlier than later.
Expect the unexpected. Be agile and vigilant to adapt the business model to market conditions.
Any business being built for the long-term, needs to reach a level of economic sustainability first. Trying anything adventurous such as scaling up in 24 months is not good, especially in the financial services space.