Approximately half of India’s exports are attributed to the Micro, Small, and Medium Enterprises (MSME) sector, contributing more than a third to the country’s GDP. According to the MSME Ministry, the Udyam Registration portal has registered over one crore MSMEs. The development of the MSME sector boosts India’s manufacturing output, employment generation, and national exports.
MSME business financing in India remains a key challenge, despite the pivotal role MSMEs play in India’s economic development. Because MSMEs tend to have small loans and limited collateral and credit history, traditional banking and financial institutions are generally reluctant to work with them. MSMEs in India face challenges such as insufficient financial knowledge, inaccessibility to timely funding, and complex regulatory procedures. To achieve India’s goal of becoming a global economic power, it is essential to understand these challenges and streamline MSME business financing in India.
Let’s take a look at the top 5 challenges of SME loans –
1. Inadequate financial literacy
Despite displaying incredible entrepreneurial grit, many MSME business owners lack financial literacy. Often, this can lead to imbalanced working capital ratios and low credit scores. In addition, failure to choose the right lender can result in higher interest rates on small business loans. Moreover, many NBFCs and online lenders must use the latest financial technologies. Therefore, the public and private sectors must work together to ensure that MSMEs seeking business loans are well-informed about finances.
2. Unaware of the Modern Financing Solutions
Acquisition on of licenses and insurance, certifications, and many more are other top challenges that impact MSMEs’ cash flow. MSMEs are unable to obtain financing on time because of antiquated regulatory practices and such regulations. An insufficient understanding of financial products and services, lack of trust, and non-familiarity with technology are other factors that prevent small businesses from using online transactions and thus causing hindrances in cash flow.
3. Trust Deficit
Since SMEs typically involve small amounts, banks don’t extend SME loans, and they believe these businesses can’t repay them, thus applying stricter regulations. MSMEs’ lack of credit rating makes them high-risk borrowers, further impacting their business loan eligibility.
4. Cumbersome disbursement
There are usually strict eligibility criteria and a variety of documentation needed by business owners who want to take advantage of traditional lending options. Furthermore, processing small business loans and crediting the funds is lengthy and laborious. This financing route is not feasible for MSMEs requiring SME loans to meet working capital needs. Since NBFCs have relaxed eligibility criteria and offer quick loan disbursements, many people are now turning to alternative lenders, such as NBFCs.
5. Collateral Requirement
Due to strict collateral requirements, small businesses often need help obtaining MSME loans. Most medium-sized companies do not own assets such as property to hypothecate. Due to this, many small business owners prefer unsecured business loans to avoid pledging assets for secure financing.
So, above mentioned were the top five significant challenges of SME loans. However, if you are a business owner, there is no need to be alarmed. You can avoid such problems by choosing the right lender.
The unique capital needs of MSMEs and the challenges they face in securing funding are many. To help small businesses grow, many financial institutions offer unsecured MSME loans that are easily accessible and require no collateral. If you’re interested in taking out an SME loan, research and calculate your EMIs using a business loan EMI calculator.
What are the benefits of supply chain finance or MSME in India?
MSMEs can escape the vicious cycle of low profits, stagnant growth, and high operational costs with supply chain finance (SCF) solutions. Low-cost financing solutions under SCF can bridge the trust gap by providing lending institutions with credit risk management tools and expanding the scope of financing to include poorly-funded MSMEs. MSMEs can benefit from supply chain finance in the following ways.
Instant working capital access
SMEs can use supply chain finance to meet urgent working capital requirements, make early payments, or access owed funds more quickly. MSMEs can access funding within hours using technology-enabled SCF platforms. SMEs can easily expand their businesses, purchase new raw materials, or update their inventories with seamless and quick financing.
Improved Liquidity
To minimize credit gaps in the MSME sector, the government provides one-time, non-recurring funds. To meet day-to-day operational requirements, MSMEs require a consistent flow of funds. As supply chain finance is based on monthly invoicing, it can help MSMEs maintain daily cash requirements and offer improved liquidity, boosting their growth.
Burden of Repayment is reduced
Compared to supply chain financing, MSME schemes have different loan terms. MSME loans offer lower interest rates, but strict repayment schedules are required. On the other hand, SCF does not require repayment since the funds are provided in advance against invoices due to SMEs. The buyer can directly collect payment in such transactions.
The Bizongo platform enables MSMEs to obtain advance payments against outstanding invoices from buyers with minimal disruption to their production processes. In addition to enhancing financial inclusion, they provide MSMEs with more diverse financing options at a lower cost. Technology advancements and funding alternatives such as supply chain financing are transforming MSME business financing in India.
The answer to your financial woes and support for your MSME is here. You can meet your working capital needs cost-effectively with our supply chain financing solutions.
FAQs
Q) At what interest rate can I get an MSME business loan?
Ans. The interest rate is around 6.10% for five years which can extend up to 10 years.
Q) What happens if an MSME business loan is not paid on time?
Ans. If a buyer fails to make a payment on time for the supplies, he/she is liable to pay a compounded fine within 45 days from the acceptance of the goods/service.
Q) What are the five basic requirements
Ans. Identity, address, passport, bank statement, and salary slip with the latest form 16.
