Simple tips for SMEs to reduce borrowing cost, save money

MUMBAI: In today's cut throat competition a rupee saved is a rupee earned and more so for small enterprises that need to fight with global giants. Generally such SMEs may not have full time CAs/MBAs as CFOs; and thus face challenges in reducing borrowing cost. With the following few tips, they can attempt to save up to 2 percent per annum on Rs 10 crore (saving up to Rs 20 lakh).

USE BUYER'S CREDIT If you import, always use buyer's credit instead of using high cost cc limits. Buyer's credit is availed by an importer from overseas lenders i.e foreign banks for payment of his imports on due date. The overseas banks usually lend the importer. Buyer's credit helps local importers access to cheaper foreign funds linked to Libor rates as against local sources of funding which are costly compared to Libor rates. MULTIPLE OPTIONS If you have exports use EPC/PCFC/ EBD/EBN export packing credit instead of using high cost cc limits (even small export turnover company, can take sub-limit with regular cc limit). Packing credit is a loan sanctioned to an exporter in the pre-shipment stage. This loan facilitates the exporter to purchase raw materials at competitive rates and manufacture goods according to the requirement of the buyer and organize to have it packed for onward export. Post Shipment Finance: EBD/EBN Exporters who have availed packing credit need finance to repay the same. This can be done by availing the post shipment finance from the lending banks at Libor plus 2-2.5 percent approx. This advance or finance is made available by the lending bank in the form of EBD (export bill discounting) facility on raising bills along with shipping documents. COLLATERAL GOODS If you have good collateral, convert part of cc in to FCNR loans & always ask for best cc rates. Cash credit is a secured working capital facility to withdraw the amount from the business account even though the account may not have enough credit balance. The amount that can be withdrawn is sanctioned by the bank based on the business cycle of the client and the working capital gap and the drawing power of the client. This drawing power is determined, based on the stocks and book debts statements submitted by the borrower at monthly intervals. Opt for working capital demand loan (WCDL): Based on the fair and conservative estimate of working capital cycle a minimum amount of CC limit shall be estimated, which will be used throughout the year. Such minimum amount should be carved out as WCDL facility. Interest on

such facility is lower by 1-2 percent compare to CC Limit ROI. SIZE MATTERS Always Bank with bigger nationalised /foreign banks instead of small co-operative/private banks: This exercise will give opportunity to the entrepreneur to negotiate for better interest rates and other charges like processing fees, upfront fees, and charges. CASH DISCOUNTS If you are supplier to big companies such as HUL, ITC, Pfizer, ONGC etc; Don't accept cash discount from them (that may approx cost you 18 percent to 24 percent per annum) instead take sales bill discounting limits from bank at 10-12 percent per annum. Cash discount is an incentive that a buyer (HUL) offers to a seller (SME) in return for paying a bill owed before the due date. Avail prompt payment discount; If you are in good financial position, always explore the possibility of availing cash discount from your suppliers (say at the rate of 18-24 percent). RATING MATTERS To increase negotiation power, go for SME rating; Banks encourage and offer some concession (1 percent) in interest rates if a party is rated by independent rating agencies like Crisil, ICRA, CARE, Fitch etc. These agencies have started separate division for SME ratings. This exercise will bring overall discipline in the finance department, apart from enabling the SME to expect best bargain for interest rates. Submit your periodical statements in time to avoid penal interest. Every borrower is required to submit certain statements monthly/quarterly/half yearly. Every client (availing cash credit) needs to submit the levels of closing stocks and statement of book debts as on the last date of the every month. Non submission or delayed submission from stipulated due date leads to penal interest of 1 to 3 percent p.a.