The Financial Express

A good omen for startups

A good omen for startups

It is a piece of good news that the central bank has formulated a policy on financing the startups that are lately emerging at a fast pace. There are success stories involving a few startups, including one having a valuation of US$100 million. Several startups have also attracted foreign investments.

Failing to locate suitable jobs, many young men and women educated in different disciplines have floated their startups, and some others are exploring the possibility of doing the same. As the Registrar of Joint Stock Companies and Firms (RJSC&F) is set to register 'One Person Company (OPC)' from the middle of the current month, the number of startups, in all probability, would go up manifold in the coming years.

The ability of the sponsor/s to manage funds remains to be the essential element behind the success of a startup. Many people employ their funds or borrow from family members or friends. But mobilising enough money by small firms has always been a problem in this part of the world. In the developed countries, there are several options to raise funds by startups. The options include angel financing, crowdfunding, small business credit cards, venture capital (VC) and small business loans.

The first three options are almost absent in Bangladesh. The last two are obtainable on a limited scale. But access to the same entails hassles. Nearly a dozen VCs are now active in the country and they have been offering capital, strategic help and introducing potential customers, partners and employees to startups. But funds from the VCs are difficult to come by as they take a deep look into the startups' potential and other aspects before investing against equity holding.

Under the circumstances, startups have been longing for small loans on easy terms from formal lending agencies. But the banks have so far not been interested in providing such loans. The central bank's decision to lend funds worth Tk 5.0 billion under a refinancing scheme is expected to fill up the void. The banks will get funds from the Bangladesh Bank at 0.5 per cent interest and they will lend the same to the startups at a 4.0 per cent rate.

The maximum size of the individual loan will be Tk 10 million with a repayment period of five years. That banks will treat the original educational certificates of the sponsors of startups as collateral remains a unique feature of such lending. Besides its own funding, the central bank has asked the commercial banks to create an individual fund, equivalent to 1.0 per cent of their operating profit for 2020, for lending to startups. However, the banks concerned would formulate their policies relating to the operation of such funds.

Hopefully, the latest central bank measures would meet the financing need of the existing as well as future startups. Yet there are other aspects of startups' operation. The VCs are designed to assist, financially or otherwise. So, the central bank should examine the possibility of channelling a part of the funds under the refinancing scheme through the VCs.

An alternative could be the development of a small cell, manned by qualified persons for the purpose, in the banks concerned. Banks, however, might show a lukewarm response to such a proposal. But they should not, since the right kind of assistance would only help the startups perform well and make them (startups) good borrowers. 

While floating the refinancing scheme for startups, the bitter experience it has encountered over the Equity and Entrepreneurship Fund (EEF) might have crossed the mind of the central bank. The central bank operated the fund, meant to help financially the agro-based food processing and software firms, between 2001 and 2009. Then the responsibility of operating the fund was transferred to the Investment Corporation of Bangladesh (ICB). However, the equity-based financing backfired as many beneficiaries of the EEF vanished in thin air. The fund is now engaged in loan-based financing. A certain amount of risk is always there in this kind of financing.

Thus, departing from the VCs' model of financing, the BB has gone for loan-based financing of the startups. The latter has found it to be safe.

The Startup Bangladesh, a venture capital fund under the ICT Division of the government, has also started disbursing funds worth Tk1.0 billion among startups. It will also provide some selected startups with a wide range of supports.

The supports that will come from the central bank and the government might be the beginning of a new era for startups. But much would depend on the selection of the right startups by banks and timely repayment of funds to the banks by the beneficiaries. 

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