The global COVID-19 pandemic has left unprecedented devastation in its wake. With economies slowing down, people and families being rendered homeless, and the end nowhere in sight, resources – especially financial resources, have been stretched thin. While most businesses have suffered, SMEs in the low carbon sector have especially struggled to stay afloat. These companies are drivers of inclusive green growth, contributing to job creation, economic development, and local innovation, but most are only months away from shutting shop. According to GIZ, over 50% of companies working on promoting clean energy access might be forced to close business in two months, and a staggering 85% may not survive more than five months under current conditions.
The main challenge is the lack of availability of finance. Clean energy companies have been handicapped by disrupted supply chains, dampening overall electricity demand, and prohibitively high financing costs. Disrupted cash flows due to the COVID crisis’s impacts have further exacerbated liquidity issues resulting from servicing of existing debt repayments.
Amid the severe funding crunch, crowdlending from international sources has remained a resilient source of alternative debt finance for clean energy companies. Increasingly, firms looking to raise funds for innovative products are using crowdfunding as the way forward to serve the domestic markets they operate in and grow internationally to generate an impact in the clean energy sector.
Helped by intermediaries, SMEs can articulate their financial requirements, prepare for detailed investor due diligence, and successfully raise debt through crowdfunding. With the help of top-notch financial and legal structuring services, SMEs can successfully navigate the challenges presented by the unconventional nature of crowdlending. For there to be a significant impact on the availability of finance for clean energy enterprises, more work is still needed. Three factors can help elevate crowdfunding and alternate finance to a level where it can fill the gap left by conventional lenders in clean energy lending.
First, the barriers to SME lending by crowd platforms need to be lowered. Crowdlending platforms must set lower transaction size thresholds and consider lending to companies with shorter track records. This will allow many more newer companies with lower funding requirements to qualify. Financial innovation is needed to pool and aggregate loans to spread fees for conducting due diligence, setting up and managing SPVs, and currency hedging.
Secondly, knowledge and experience sharing must be streamlined between lending platforms and common legal structures developed for transactions. The small ticket sizes of loans make it prohibitively expensive to conduct first-hand country due diligence and structuring for each transaction. Delays caused by legal processes cost valuable time for borrowing companies with cash runways frequently shorter than 6-months.
Lastly, the paucity of financial intermediaries in the clean energy sector to bridge the gap between crowd platforms and Indian companies looking to raise funds must be addressed. Specialized firms can help identify a pipeline of deserving companies, match them with willing lending platforms, and help with the speedy execution of lending transactions. This alone can have a significant impact on increasing access to finance by clean energy enterprises.
Today, there are examples of companies that are bucking the trend and raising funds through global crowdlending platforms. These companies are also using carbon finance to enable fundraising campaign. Once complete, the funds raised enable the purchase, distribution, and marketing of products for low-income families.
Such projects are an example of commercial lending, enabled by innovative financial structuring, from which clean energy benefits are derived and will accrue to deserving rural citizens. This model demonstrates that it is possible to create a unique combination of poverty reduction, environmental protection, health promotion, and innovative financing. More importantly, it would have also demonstrated crowdlending’s viability as an alternative fundraising path for SMEs in clean energy.
[Lakshmi is Head of Finance and Credit at Mynergy, and Juneja is Co-founder and CEO of Greenway Appliances. This article is published as part of a series titled Energizing Rural India under an editorial partnership between ETEnergyworld and Power for All]