India’s economy is accelerating at a fast pace and the MSME sector is considered the backbone of the country’s exponential growth. From manufacturing, and processing, to production, India’s MSME sector spreads across an array of verticals, with a network of 633.9 lakh MSMEs. Having exhibited robust performance amidst the interlude of global uncertainties, this sector continues to act as an indispensable asset for large enterprises. At the same time, it serves as a beacon of hope to uplift the country’s socially backward areas, paving the way for inclusion.
Despite its significance, the industry’s little or no knowledge about its capabilities has hindered it with the hassle of securing financing, making growth a far-reaching attribute. While there has been a steady rise in government initiatives and policies to support the sector’s financial needs, there is a slow proliferation of the same. As a result, it fails to alter the inconsistencies in accessing MSME loans. Having said that, the emergence of NBFCs is aimed at propelling the financial capacity of the MSME sector which demonstrates the beginning of a remarkable future.
Limited collateral
One of the foremost hurdles undermining the MSME sector is the absence of substantial collateral, posing difficulties for MSME players to meet the criteria for conventional loans.
Conventional lenders, primarily banks and financial institutions often require collateral for loans, but there is a high chance that MSMEs may not have assets to pledge as collateral, which limits the amount of financing and subsequently hinder their growth.
In order to overcome this hurdle, MSMEs should pivot towards alternative financing options such as microloans, crowdfunding, or government-backed loan programs especially tailored for MSMEs.
Credit history
Unlike large corporations, MSMEs often have poor or limited credit histories, especially if they’re new to the market, this acts as a major roadblock in attaining secured loans. In the absence of a track record of credit history, investors are more likely to refrain from participating in the MSME venture, making financing a challenging avenue for them. While it’s clear that building a strong credit history takes time, MSMEs can always work towards improving their creditworthiness by keeping debt levels lower, ensuring the timely payment of bills, and establishing relationships with lenders who specialise in working with small businesses.
Managing Director & CEO
Namdev Finvest
Documentation requirements
When it comes to MSME financing, traditional avenues such as banks and lending institutions always ask for rigorous documentation. This can prove to be worrisome for MSME players with limited resources. Not only is the documentation process stringent, but the failure to submit these records reduces the trust of banks in terms of repayment. In tandem, MSMEs should focus on streamlining the process by organising the financial records and preparing a comprehensive business plan. Furthermore, MSMEs should consider working with a financial advisor who can help them navigate the stringent documentation requirements.
High-interest rates
Despite the remarkable growth witnessed by the MSME industry, the sector continues to be perceived as a risky investment. Subsequently, MSMEs are charged with high interest rates which limits their ability to obtain financing in the first place. Faced with exorbitant rates, MSMEs find it difficult to repay loans on time, which further tampers with their ability to seamlessly invest in their venture. To mitigate this hurdle, MSMEs need to explore financing options with lower interest rates and negotiate terms with lenders which will enable them to improve the business’s financial health and empower them to qualify for more favorable rates in the future.
Lack of awareness
In terms of awareness, the majority of the MSMEs in the country lack clarity on financing alternatives available to them. This unawareness about the multiple options whether it’s government schemes or new-age lending platforms creates a wide gap in terms of accessibility and proliferation. Creating awareness is not merely about inculcating information, but entails investing time in researching different financing sources, organising workshops on business financing, and networking with other MSME entrepreneurs who can share their experiences and insights.
Amidst India’s complex MSME financing landscape, there is a pressing need for adopting a multi-pronged approach. Marked by the collective efforts made by the government, and new-age NBFCs to bolster financing options, the MSME industry stands a chance to unlock its full potential, bolstering growth and development across all vertices. With the world heading for complete digitisation, it’s time MSMEs embrace digitised financing solutions, aimed at improving their chances of securing financing to lead the country into the next chapter of an upward trajectory.
