Challenges With MSME Business Financing In India

In recent times, India has observed immense growth in Micro, Small and Medium-sized Enterprises (MSMEs). The growth of MSMEs has helped in generating various job opportunities for every sector. However, there are various challenges in running an MSME business, especially in India. The biggest challenge could be getting a Business Loan without collateral. Various factors impact businesses such as economic factors, political factors, socio-economic factors, and others. Alongside this, we have seen numerous initiatives from the government to help the MSMEs sector grow. While these initiatives are helping them to operate smoothly, there are still a few challenges that are impacting the MSME sector. In this blog, we will further read about the challenges with MSME business financing in India.

1. Lack of Financial Expertise MSME Business

One of the common mistakes of MSMEs is a lack of financial expertise during the initial days. Having financial expertise while running a business provides added advantage in the growth of the business in the long run. A lack of financial expertise could be a disadvantage when choosing a lender and managing the working capital and cash flow of the business. There are several lenders in the market providing Business Loan without collateral at an attractive interest rate and having easy MSME loan eligibility. However, there are only a few that are suitable for your business. Choosing the right lender with a low-interest rate helps in managing the overall finances of the business. 

2. Liquidity Challenge 

Capital is one of the major differences between small businesses and large businesses which cause liquidity issues. Generally, the business operates on credit payment and any delay in payment from customers causes further delays in payments to vendors. MSMEs operate on small capital and a significant part of this is used for day to day to operations. And to tackle short-term finance needs, these MSMEs opt for quick funding options. 

3. Collateral for MSME Loan 

With challenges like liquidity, low capital, and lack of financial expertise, lenders shy away from offering a loan to MSMEs. They impose several restrictions and regulations – high-interest rates, the requirement of collateral, and complex documentation processes. Some MSMEs don’t have substantial assets that can be kept as collateral, such businesses opt for Business Loan without collateral. Moreover, there are lenders such as Poonawalla Fincorp offering collateral-free Business Loans for MSMEs loaded with features such as an online loan process, minimal documentation, competitive interest rates, and simple Business Loan eligibility criteria. 

4. Lack of Knowledge Regarding available Funding Options

Not all MSME owners are aware of the funding options available to them. Also, they might lack the knowledge and wherewithal to choose the best lender for accessing Business Loans. This might lead to confusion, lost opportunities, and wrong decisions. Choosing the wrong lender might do as much harm to your business as not getting any finance at all. You might end up with unfavourable loan terms, a high interest rate, etc. 

  1. Alongside, below are a few other challenges faced by MSME Businesses: Low Availability of Skilled Labour

As compared to other countries, India is still lagging in terms of the availability of technology and technical expertise, especially for MSMEs. In India, MSMEs are highly dependent on low-wage workers who possess less knowledge and lack adequate formal education. 

  1. Lack of trust 

Irrespective of several initiatives for MSMEs and lenders offering attractive loan offers to MSMEs, there is a still lack of trust when it comes to giving loans to MSMEs. This lack of trust leads to lenders imposing regulations on MSMEs. Also, the majority of MSMEs are start-ups having a lack of credit history or low credit score creating a challenge for them while applying for MSME Loans.

  1. Access to Advanced Technology advancement 

Technological advancement is unevenly available throughout India. There are few MSMEs with the right kind of technology for their products whereas few firms still struggle to access the latest technology. Such uneven distribution of technology hinders the financial growth of MSMEs. 

While there is growing awareness regarding MSME business financing in India, some areas of concern remain. However, this also means that there are numerous untapped opportunities for banks and NBFCs in India, provided they are agile enough to make the best use of these opportunities.

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