MSMEs are considered the backbone of many economies worldwide and play a crucial role in driving economic growth, innovation, job creation, and overall socio-economic development. However, financial challenges for Micro, Small and Medium-sized Enterprises can hinder their growth and development.
Small and medium-sized enterprises are essentially independent businesses that fall within a certain range of characteristics such as annual turnover rate, number of employees, or operating unit. The categorization of MSMEs is entirely dependent on the country these businesses originate from and how they classify businesses as small to medium in operations. According to PIB, India has more than 63 million MSMEs spread across the national landscape, and they have been contributing nearly 40% of overall India’s exports. MSMEs in India contribute to around 6.11% of our nation’s manufacturing GDP and have reportedly contributed to around 24.63% of the GDP from the services sector.
MSMEs’ contribution to the economy is envisioned to drive up the export rate and achieve the challenging target of 1 trillion exports in 2027, as reported by PIB. As MSMEs have relatively low strength in terms of employees and operate in small units as compared to large businesses, they face several issues in financing and sustaining their business long-term.
Let us investigate some key issues in MSME financing:
Lack of business strategy and documentation:
Since MSMEs operate out of smaller units, their business strategy or documentation might be underdeveloped. Further, due to insufficient finances, documentation makes it difficult for lenders and investors to provide capital assistance. When financial statements are unorganised and not maintained properly, MSMEs cannot raise their business credit scores. This leads to a lack of access to capital from official sources.
Inadequate infrastructure:
Infrastructure is an important aspect of any business venture, big or small. A lack of proper physical infrastructure leads to delays and obstruction in operations. For MSMEs, this issue translates into larger problems like hindering production capabilities, increased cost, and negatively decreased overall efficiency. On an operational level, however, inadequate infrastructure causes a lack of access to essentials like water and sanitation.
Limited access to funding options:
A lack of credit scores leads to a high-risk perception of MSMEs, and this problem is further exacerbated as MSMEs resort to informal sources of capital funding. This in turn makes any business capital accrued flow towards the repayment of loans. This limits the upward mobility of MSMEs, stunting their potential.
Lack of access to business networks:
What sets back MSMEs is the lack of business networks. Aligning one’s business in the radius of popular entrepreneurial networks ensures upward mobility. With no access to entrepreneurial networks, MSMEs fall short in business development, training, and mentoring. This limited support from peers and industrial experts makes it difficult for MSMEs to scale and grow.
Regulatory challenges:
Regulatory compliance is one of the major challenges that holds back MSMEs from their full potential. Acquiring licenses, permits, reporting requirements, among others, can be time consuming and burdensome for MSMEs. A conducive environment helps MSMEs to sustain and grow efficiently. However, addressing these issues would require cooperation from governmental level and from the MSMEs.
Some suggestions to address the key issues in MSME financing:
Financial support:
MSMEs can seek funding through venture capital or crowdsourcing for the initial stage of business development. However, it would also prove to be beneficial if proper financial records are maintained and enterprises build a strong credit history.
Digitalisation:
The advent of digitalization has made operations easier. MSMEs should resort to digitalisation to reduce costs and reach a wider consumer base. Additionally, digitalization can help in reducing company size with increased efficiency.
Increase brand awareness:
Strategic use of newer forms of marketing mediums can ensure that businesses reach a wider consumer base. This also opens avenues for collaboration and increases visibility in business networks. Once a brand identity is set, upward mobility or scaling the business becomes easier over time.
While the Indian government has taken significant steps to address the challenges faced by MSMEs, there is an ongoing need for continued efforts to support and strengthen the sector. It is crucial to focus on improving access to finance through innovative financing mechanisms, expanding infrastructure development, promoting technological upgradation, and enhancing skill development initiatives. Additionally, streamlining regulatory procedures and creating a conducive business environment can further empower MSMEs to thrive. By nurturing the growth of MSMEs, India can unlock its full potential in terms of economic growth, employment generation, and inclusive development, contributing to the overall prosperity of the nation.
