With an increasing number of vendors starting manufacturing units in India, demand for surface mount technology (SMT) based equipment has seen an ascent. However, even now, only 10 per cent of manufacturing in India is being done using SMT. The concept has not been widely adopted in the small scale industry and remains limited to big players. Despite manufacturers vouching for its enormous potential, SMT is yet to become popular in India as the cost involved in buying and installing an SMT line is a strong deterrent. Small and medium entrepreneurs (SMEs) cannot afford to buy SMT machines and equipment, which range from $50,000 for a compact multi-mounter and go up to $300,000 for a high speed chip shooter.
By Sandhya Malhotra
Thursday, June 17, 2009: In a study conducted by Milagrow Business and Knowledge Solutions, it was found that 74 per cent of the sick SMEs in India attribute their state of affairs to low availability of funds. This is not surprising, as the same study also showed that 92 per cent of all those interviewed at SMEs are dependent on personal or family savings. In this light, let’s explore a few avenues for external funding that SMEs can access.
There are ways and means of purchasing SMT equipment without feeling the burden of the heavy price, though there are several obstacles. Self financing, bank loans or support from SMT vendors are the options open to SMEs. But the problem is that small companies don’t have the capital required for self funding, which leaves them with the next option—a bank loan.
Bank loans: A tedious process
Bank loans have been the most traditional way of securing funds. There are two types of loans—term loans and working capital (WC). Term loans need collateral and securities and are used for expansion of the manufacturing unit, purchase of machinery, etc. WC is generally used for purchase of raw materials.
However, bankers hesitate to lend to SMEs due to the greater risk of non-performing assets (NPAs). Moreover, large firms that raise funds through both the capital market and banks have increasingly turned to banks. And lending to big firms is more lucrative for banks than lending to SMEs. This trend is worrisome as for most SMEs in India, banks are the only source of funds.
Sharing his concern on the issue, Alok Gupta, director, Prosem Technology, a Delhi based supplier of SMT equipment and services for the electronic manufacturing industry, says, “The problems faced by SMEs in getting funds for purchasing SMT machines 10 years back, still exist today. Despite the fact that the demand for SMT machines and equipment is very high since timely output and good quality are major aspects in manufacturing, yet Indian banks and financial institutions are not aware of the importance of SMT machines and its technology.”
In India, private banks cater more to retail banking rather than giving loans to SMEs for industrial machines. “Most of our customers have their accounts with public banks but try to get loans from private banks. But here, private banks are also hesitant. If private banks offer loans at all, they do so only to large companies,” says Gupta.
Delhi based SMT equipment supplier, R S Gupta, senior manager, DVS Group, also shares the same concern. “Getting a loan from a public or private bank is a Herculean task. Bankers need to be convinced that they are not taking inordinate risks with you,” he says.
Applying for loans from banks is quite time consuming. It takes more than four months to obtain bank loans depending on the loan amount and production capacity. “Usually, manufacturers don’t want to block their working capital and prefer to borrow money from the bank. Some of our customers are struggling to get a bank loan for a project of Rs 1 crore. In a way, the advantage of getting a loan is that the working capital can then be used most efficiently, maybe on raw material or to cover the operational costs,” adds Gupta.
Technology upgrades: A deterrent
SMT machines and equipment have, over the years, changed dramatically. From incorporating different functionality to increasing the speed of the machines, the SMT equipment market has been transformed, keeping pace with the ever altering requirements of the highly dynamic electronics manufacturing industry.
Moreover, the no-flux and no-lead manufacturing processes that have been made compulsory have forced many SMT manufacturers to adopt the new processes and upgrade their existing systems. Unfortunately, the constant need to upgrade the machinery makes banks hesitant to finance SMT machines. As per the bank agreement, banks can sell off the machines or equipment if the borrower fails to repay the loan. With technology changing fast, old machines are becoming obsolete. This situation creates a fear in banks as there are a few takers to buy such obsolete machines. To avoid such issues, banks stay away from extending credit to small and mid sized companies, says Gupta.
He adds “Since banks don’t understand the technology, they want a written assurance from the manufacturers that they will take back the machines.”
The basic purpose of financing is to let small units get the required funding and face competitors effectively. Subhash Goyal, director, Digital Circuits, an EMS company, says, “It is easier to get loans from banks whom the company has transacted with for more than three years and has hence built a good rapport. In such cases the bank can give a loan covering 75 per cent of the cost of new equipment, which can be repaid in five to seven years.”
According to Suresh Nair, director, Leaptech Corporation, “If the customer can meet the criteria set by a particular bank, there should not be any problems in getting the funds.”
Banks favour an established businessperson with a solid credit rating, a sizeable bank account, experience in the business they propose to enter, and business plans that show the ability to repay the loans. If the company lacks these, then it needs to double its efforts to convince the banker about the loan.
Proper documentation is the key to getting funds from the bank. Upon approval for even a small business loan, you will typically be asked to produce several documents and sign several papers, including a loan agreement, a promissory note and some kind of personal guarantee, with collateral.
Though most people do not give more than a cursory glance at these documents, it is important to understand the terms and conditions you are agreeing to when you sign these papers.
The detailed project report including a comprehensive report about the industry the customer is catering to, should cover what the future holds for that industry, the strengths of the company and its promoters, and the financial background that would help them overcome the challenges in getting funds. These are the basic requirements. Banks also check the financial health of the company by scanning three years’ balance sheets.
Besides bank loans, leasing is another area to be explored. It is very popular outside India, particularly in Europe and the US. Leasing is a process by which a firm can obtain the use of certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments. Many big multinational companies buy machines on lease, typically for a five year period. However, in India, this practice is not very prevalent. As of now, we have a few renowned leasing companies, including First Leasing Company of India and GE Capital India.
While explaining the leasing option, Manvi Mathur, assistant vice president, First Leasing, says, “Leasing is touted as off-balance sheet financing. While the vast majority of industrial machinery is still acquired for cash or with a conventional loan, in India leasing has started becoming a popular choice as it offers flexibility in payment terms.”
First Leasing offers leasing to all types of companies ranging from the mid to large sized. But its credit norms are not suited for small companies. “Before signing a deal with the buyers, we go through their financial capability, promoters’ profile, product range, services and future production plans. And once we are satisfied with the company’s documents, we start the process. Normally, we take less processing time (three weeks) than banks,” she says.
“Typically, mid sized manufacturing companies come to us without doing any homework, which consumes most of our time,” says Mathur. “Surprisingly, many applicants don’t even have the slightest idea how or when they intend to repay the money. Often they don’t even know how much money they need. Lenders, therefore, say no to such borrowers,” she adds.
SMT manufacturers offer solutions
As funding is a challenge for SMEs, SMT manufactures are now working on offering flexible solutions to their customers. “It takes more than five-six months to close a deal. Therefore it has become imperative for the SMT manufacturers to work out easy ways of selling their machines with minimum risks,” says Gupta.
Special payment terms: “We do not offer funding to our customers but accept deferred payments backed by either a letter of credit (L/C) or a bank guarantee,” informs R S Gupta.
While explaining how an L/C works, R S Gupta says, “When a buyer requests the shipment of goods, the seller will require a guarantee of payment. The bank will issue the L/C on either the direct payment of the amount along with the processing fees or through the loan underwriting method. The buyer can then send a copy of the L/C to the seller. Also, the issuing bank sends another copy to the specified bank of the seller. When the seller produces the essential business documents as mentioned in the L/C, the issuing bank will transfer the L/C amount to the seller’s bank account.”
“Moreover, if the customers try to arrange funds from banks or financial institutions, we help the customer with all equipment related documentation,” adds Nair.
Buyback offer: SMT manufacturers are also considering the idea of offering second hand machines, which they have found to be the best alternative for cash strapped buyers. The used machine market is about 30-40 per cent of the overall market. Says Gupta, “Especially for startups that don’t have sufficient capital, buying a used SMT machine is the best option. We have tried this and it has been successful,” he adds. “We also take back defunct machines from the customers and pay them as per the market value of the machine. Later, we search for customers who require such machines,” he says. There are international players like Adopt SMT, SMTnet.com and Tekmart International that offer used SMT machines via Internet.
Renting machines: Another method now being adopted is the renting of machines. “This is also a business opportunity for us. We are working on this innovative solution,” says Gupta. “Such arrangements are best suited for small and medium companies. We plan to take an advance of six months of the rent, along with post dated cheques and install new or old machines. Besides this, some companies are also giving credit for up to two years on an EMI basis,” adds Gupta.
Electronics Bazaar, South Asia’s No. 1 electronics B2B sourcing magazine