Read this essay to learn about the need for Institutional Finance for Small Entrepreneurs !
In order to actually make the enterprise running, the entrepreneur still needs to undertake some more activities.
For example, he/she needs to procure material, machinery, men, etc. to produce some product(s). Finance is required to procure all these inputs and resources required to run an enterprise. For example, it is finance only that enables an entrepreneur to buy raw material or input from someone, purchase machinery and equipment from someone else, hire manpower from labour market, meet day-to-day business expenses and so on.
These resources and inputs cannot be procured without finance. The fact remains that it is the availability of finance that keeps the enterprise wheel on, or say, that keeps enterprise running on continuous basis. It is due to this vital role of finance in enterprise running, finance is regarded as life-blood of an enterprise.
Now an important question arises is where does this finance come from? Alternatively speaking, what are the sources of entrepreneurial finance? There are two major sources of entrepreneurial finance: entrepreneurs own funds and funds from outside like financial institutions.
There is ample research evidence available to state that the scope for entrepreneur’s own funds is highly limited. The reason is not difficult to seek. Majority of entrepreneurs are unemployed before assuming to entrepreneurial career. As such, they lack in their own funds required to run the enterprise.
Therefore, they depend on outside funds required to run their enterprises. The result is either some prospective entrepreneur give up the idea to start their enterprises or start enterprises with inadequate funds. The consequence is the enterprises suffer from inadequate funds since beginning itself.
Such a state of enterprise affairs is just like enterprise malnutrition. Then, the future of enterprise is a common man’s guess: sickness and closure. An idea about the magnitude of this problem can be had from the fact that about 10 per cent of total small enterprises in the country are sick of which 90 per cent of units have become non-viable, i.e. the incidence of sickness has advanced to the extent beyond repair (Government of India 2010).
Lack of funds has been found one of the major causes of sickness in small enterprises. The lack of funds causes malnutrition to small enterprises which, in turn, leads to high infant mortality rates among the small enterprises. In view of above, there is a need for extending financial support to entrepreneurs so that they do not suffer from shortage of funds and, in turn, do not fall prey to sickness and ultimately closure.
Thus, the need for institutional finance for small entrepreneurs can be imbued with multiplicity of justifications in a more orderly manner as follows:
a. Small enterprises in India are literally small in size and resources including financial resources.
b. Due to the lack of own funds, small entrepreneurs fall prey to local money lenders who are generally known as exploiters by charging exorbitant high rate of interest.
c. Burden of high interest rate on borrowed capital from local money lenders, on the one hand, and failure of entrepreneurs in repaying loans due to their weak financial position, on the other, makes their financial position more and more vulnerable.
d. Failure in repaying loans in extreme cases leads the money lenders to usurp the assets of small entrepreneurs.
e. Availability of funds from local money lenders is, moreover, uncertain and untimely also.
f. Small entrepreneurs need protective finance under set rules and regulations not the exploitative finance without any prescribed rules and regulations.
Finance is one of the essential requirements of any enterprise. Small entrepreneurs, therefore, need to know very clearly about the type and extent of their financial requirements. Integral to financial requirements is to know about the possible alternative sources from which finance can be availed of.
Given the shortage or lack of entrepreneurs’ own funds/resources, the Government of India, as a part of its policy of promotion of small-scale sector in the country, has set up a host of institutions to meet the financial requirements of small entrepreneurs.