Bodes well for startups
It’s good news that the central bank has formulated a policy for funding startups that are emerging at a rapid pace. There are success stories involving a few startups, including one valued at US $ 100 million. Several startups have also attracted foreign investment.
Failing to find suitable jobs, many young men and women trained in different disciplines have launched 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)” as of the middle of the current month, the number of startups, in all likelihood, would increase dramatically in the past. years to come.
The ability of the sponsor (s) to manage funds remains the essential element of a startup’s success. Many people use their funds or borrow from family or friends. But raising enough money by small businesses has always been a problem in this part of the world. In developed countries, there are several options for raising funds through startups. Options include angel funding, crowdfunding, small business credit cards, venture capital (VC), and small business loans.
The first three options are almost absent in Bangladesh. The latter two are available on a limited scale. But accessing the same comes with hassle. Almost a dozen VCs are now active in the country and they have offered capital, strategic assistance and introduced potential clients, partners and employees to startups. But funds for VCs are hard to come by because they thoroughly examine the potential of startups and other aspects before investing against stakes.
Under these circumstances, startups crave small loans on easy terms from formal credit agencies. But banks have so far not been interested in such loans. The central bank’s decision to lend funds worth Tk 5.0 billion as part of a refinancing plan is expected to fill the void. Banks will get funds from the Bangladesh Bank at an interest rate of 0.5% and they will lend the same to startups at a rate of 4.0%.
The maximum amount of the individual loan will be Tk 10 million with a repayment period of five years. A unique feature of these loans is that banks treat original training certificates from startup sponsors as collateral. In addition to its own funding, the central bank has asked commercial banks to create an individual fund, equivalent to 1.0% of their operating profit for 2020, to lend to startups. However, the banks concerned would formulate their policies relating to the operation of these funds.
Hopefully the latest central bank measures would meet the funding needs of existing and future startups. Yet there are other aspects of how startups work. VCs are designed to help, financially or otherwise. Thus, the central bank should examine the possibility of channeling part of the funds of the refinancing scheme via VCs.
An alternative could be the development of a small unit, run by persons qualified for this purpose, in the banks concerned. Banks, however, could show a lukewarm response to such a proposal. But they shouldn’t, because the right kind of assistance would only help startups perform well and make them (startups) good borrowers.
As he floated the startup refinancing scheme, the bitter experience he had with the Equity and Entrepreneurship Fund (EEF) may have crossed the mind of the central bank. The central bank managed the fund, intended to financially assist agribusiness and software companies, between 2001 and 2009. Subsequently, the responsibility for operating the fund was transferred to the Investment Corporation of Bangladesh (ICB). However, the equity financing backfired as many EEF recipients vanished into thin air. The fund is now engaged in loan financing. A certain risk is always present in this type of financing.
Thus, starting from the financing model of VCs, the BB has opted for credit financing for startups. The latter found it safe.
Startup Bangladesh, a venture capital fund under the government’s ICT division, has also started disbursing Tk 1.0 billion worth of funds among startups. It will also provide selected startups with a wide range of support.
The support that will come from the central bank and the government could be the start of a new era for startups. But a lot would depend on the selection of the right startups by the banks and the timely repayment of funds to the banks by the beneficiaries.