Grappled with weakened finances, mounting debt and inability to quickly adapt to the changing consumer behavior brought by Covid-19 protocols, small businesses in huge numbers are disappearing.
The number of distressed small firms looking to exit have doubled to 20 per day during the second wave of disruptions as compared to the first.
While these businesses may be pint-sized (less than Rs. 2 crore), these failures could wreak longer-lasting unemployment and broader economic damage.
Since April 2020, at least 4,900 owners have listed their businesses for sale with restaurants, fashion, gyms, cloud kitchen and event management companies dominating the space, according to data shared by online dealmaking firm SMERGERS.
“In response to the Covid-led revenue shock, businesses that are looking to close include mostly those who are in services industries, such as, food, main street fashion and educational services,” said Vishal Devanath, Founder & CEO – SMERGERS.
These firms are looking to sell their businesses primarily because of financial hardships on the back of nil sales and rising cost especially due to physical distancing and mandated operational restrictions that began during the pandemic.
Manufacturing MSMEs, too, have their own set of challenges such as rise in raw material prices, delay in payments from retailers and distributors, labour shortage, etc.
The survivors of the first wave are now left with zero capital to even update their business models. At the same time, they are scared to take on more debt to grow.
Broadly, there is no concept of mergers and acquisition (M&A) for small businesses. It is either a fire sale of assets or savvy investors infusing funds to help them sustain the short-term uncertainties.
In fact, Devanath says, investors are seeing through the opportunity to pick up long-term businesses at beaten-down valuations.
“What we are seeing on our platform is that healthcare, technology, food and beverage are the top three sectors where buyers are showing interest,” he added.
Call for support
India has approximately 6.3 crore-odd micro, small and medium enterprises (MSMEs) contributing to 30 per cent of the nation's GDP. Of this, over 80 per cent are micro enterprises with a turnover of less than Rs. 5 crore.
While some have been trying to liquidate the assets, a myriad of small firms are not digitally empowered which have left them with no option but to shut shop.
Over 10,000 companies were shut down voluntarily in the country between April 2020 and February this year, the latest data available with the Ministry of Corporate Affairs showed.
But again, that is only a part of the carnage as the spate of silent failures goes largely uncounted because real-time data on small business is notoriously scarce.
One of the primary issues that led to closure of small businesses is no wage support.
According to Vinod Kumar, President, India SME Forum, about 42-44 per cent of the businesses in the services industry and 12 per cent in the manufacturing space were forced to shut down with no access to credit at all.
The coverage of all the financial assistance combined, that were rolled out by the central government to help Covid-hit MSMEs, is less than 12 per cent. Consider this.
Only 33 lakh MSMEs were estimated to benefit from the widely-advertised Emergency Credit Line Guarantee Scheme (ECLGS), which means 95 per cent of the small businesses were already left to survive on their own, explained Kumar.
Similarly, other schemes and financial packages have barely reached this stratum of business owners.
“Both the Centre and the states must come out with a uniform set of policies, be more agile on how they want to create and save jobs because if these small businesses are not able to survive, then there will be a dearth of jobs. Corporates simply cannot fill the deep unemployment hole,” he added.
To be sure, the MSME sector provides employment to almost 12-14 crore people.