Starved for funds, startups register as MSMEs for government support: Report

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As resources continue to dry up, startups are looking to register as medium and small enterprises (MSMEs) in order to access sops made available for the segment.

Finance Minister Nirmala Sitharaman announced a slew of measures for the MSME sector as part of the Centre’s Rs 20 lakh crore fiscal stimulus package to help the economy deal with effects of the coronavirus pandemic.

And as traditional funding sources dry up, startups are considering taking the MSME route to gain government assistance, Mint reported.

Shashank Moddhia, CEO of medical startup The Renal Project told the paper, “We need access to funds and applied for the MSME registration to avail collateral-free loans at a time when it is critical for us to obtain expensive medical equipment to keep centres running.” The company operates a chain of dialysis centres in Pune and Mumbai.

Moddhia is not an exception. The credit squeeze has caused many startups to explore the option.

Sanjay Mehta, founder and partner 100X.VC told the paper that the method would “become a necessity” and would also provide “benefits from measures such as MSME incubators.” Mehta is a board member of TiE Mumbai, which offered the initial guide for startups willing to register.

Among the benefits is the Centre’s creation of a Rs 50,000 crore fund-of-funds to help high-growth MSMEs get listed on exchanges. Commerce and Industries Minister Piyush Goyal had also stated that startups could be eligible for additional liquidity from MSME credit support schemes listed under Atmanirbhar Bharat.

There are, however, stringent rules for businesses to qualify as MSMEs, they also cannot remain MSMEs through their lifetime. The solution may thus only be a temporary one to help them make it through the COVID crisis, the report noted.

There are also those – venture capital companies – who are not in favour of the move. Mohit Gulati, managing general partner, ITI Growth Opportunities Venture Fund told the paper that institutionally-funded startups are fiscally conservative, stretching reserves for up to a year.

“It is the non-funded companies that are more likely to register at present for the lack of backing,” he said, adding that startups might eat into the support meant to be for MSMEs. “Startups registering as MSMEs can really hurt SMEs because they compete with much larger businesses for the same bank loans. We don’t encourage our startups for MSME registrations even if they are in a position to do so, including those in manufacturing space," he added.