Startups or SMEs: Which One Should You Choose

There are quite a few differences between startups and SMEs. The primary difference is how they are funded and whom the funds are given too. The guidelines given by the Government of India determines how the classification between startups and SMEs are done. Based on these classifications the funding, benefits, and exemptions are also allocated.

Be it a startup founder or a small and medium sized business enterprise (SME) owner, often both experience the same hiccups and growth curves while setting up their business. In terms of their investment, or the lack of receiving corporate funding the stories narrated by the founders of a startup or an SME is often quite similar. While the experience in starting the business might be similar but the process of the funding mechanism, the journey from the idea of getting the operation commercial is quite different. Even the customer base for a startup company and an SME is quite different in most cases. So if someone is deciding to start a new business under, which category should you be putting it under startup or SME?

The Difference Between Startup and SMEs

In India, a startup business has been defined as a registered company/business that has been in existence for seven years or less. The annual turnover of the business cannot be more than Rs.25 crore in any of the years since it has been established. Other important criteria for qualifying as a startup is that the business must be work for developing and improving products, service or the process of service. The business should also have a model that has high growth potential and have the opportunity to generate high employment or accumulate wealth. Furthermore, the business should be innovative or work towards innovation.

SMEs are defined as small-scale units with plants and types of machinery that have an investment of Rs. 1 crore. But it is of utmost importance that the SME meets the condition of it not being a subsidiary of an industrial undertaking or controlled by it. This condition is put in place by the Government of India to ensure that the benefits given to SMEs are not availed by large corporates by setting up small subsidiaries.

With these differences between startups and SMEs, there are also a certain set of different benefits that each offer, based on that too one could decide, which one to opt for when starting a business.

Benefits of starting a Startup

Startups are quite a good economic boost for the Government of India. To ensure the flourishing of startups along with the Government of India, state and local governments are providing different benefits to the entrepreneurs and startup companies.

• Registration can be done online by visiting on StartupIndia website www.startupindia.gov.in
• For startups as venture capital fund government has set up Rs.10,000 crores.
• First three years the startups get tax exemption.
• Startups are exempted from certain criteria when applying for government tenders.
• Investors receive a tax exemption on the basis of venture funds established by the government. 
• Registering under startup includes tax exemption, patent protection and the financial assistance that are more flexible.

Benefits of SMEs

• Benefits are given to SMEs for manufacturing certain products. This is for the purpose of creating competition and employment opportunities.
• 350 items are included under the Government Purchase Programme for the SME.
• 10 percent space for small-scale units is allocated and special economic zone (SEZ) is required to follow that.
• There is the MSME Act that offers loans for upgrading of technology, skill and cluster development, tool rooms, competitiveness in manufacturing, creating energy efficiency products and improving product quality. 
• Any SME whose post-issue face value is not more than Rs.25 crores can receive exemption from the government of India. Also, there are other financial assistance offered to SMEs in relation to getting loan for their business. 
• If one registers under SME one can receive priority funding under the SME financing, the rate of interest is lower in such financing and direct tax and excise exemption. 
• The Government of India in 2018 also launched a new portal for helping SMEs with fast-track loans. This would enable the banks to provide loan approvals to entrepreneurs of Rs 1 crore within an hour. Also, the entrepreneur would not have to keep visiting branches to get the small business loan approval or the amount approved.

With all these benefits offered to entrepreneurs, there has been a significant rise in MSMEs. In early 2018 it was reported that over five million MSMEs have accessed formal credit and from Indian banks have live credit facilities.

Despite the similar experience that a startup owner and an SME owner might have had, there are quite a lot of differences in how they operate and how the government helps them out. Depending on those ones can decide which kind of setup would benefit them the most.