Challenges with MSME Business Financing in India

The Micro, Small, and Medium Enterprises (MSME) sector is a vital part of the Indian economy, accounting for nearly half of the exports in the country and contributing more than a third to the national GDP. According to the MSME Ministry data, over 1 crore MSMEs are registered on the Udyam Registration portal. The development of the MSME sector is critical for the inclusive economic growth of India and boost the manufacturing output, employment generation, and national exports of the country.

Despite the pivotal role of MSMEs in India’s economic development, MSME business financing in India remains a key challenge. Traditional banking and financial institutions are generally reluctant to work with MSMEs because of small-ticket size loans and the limited ability of the MSMEs to provide collateral and relevant credit history. Access to timely MSME funding, complex regulatory procedures, and insufficient financial knowledge are some of the daunting obstacles faced by MSMEs in India. Understanding these challenges and streamlining MSME business financing in India is important to achieve India’s goal of becoming a global economic power.

What are the roadblocks to MSME business financing in India?

Lack of formal finance, limited access to global markets, unavailability of a skilled workforce, and lack of modern technology solutions are some of the impediments hampering the growth of the MSME sector. Although the government has introduced several MSME loans and MSME funding schemes to resolve the financing issues, certain gaps remain that are preventing the sector from functioning well. Let us take a look at some of the challenges hampering MSME business financing in India.

1. Requirement of Collateral for MSME loans

MSMEs represent a high-risk sector for the bank as they typically have a low credit rating. Even though MSMEs make a significant contribution to the country’s economic development, many banks and financial institutions are wary about lending to this sector. They are skeptical about the loan repayment capabilities of the MSMEs, so they apply stricter regulations on small businesses. The process of availing of MSME loans involves complex documentation, the necessity of collateral, strict repayment terms, and high-interest rates. Such requirements make it difficult for small businesses to secure MSME loans. Since micro and small businesses do not possess a property that can be kept as collateral, such businesses opt for unsecured MSME loans from lenders that don’t require them to pledge any assets for funding.

2. Inadequate Financial Expertise

MSME entrepreneurs often do not possess adequate financial knowledge to make the right business decisions. Without financial literacy, MSMEs are not able to choose the right lenders for their business, leading to higher interest rates and low credit scores. Poor financial decisions can also lead to working capital and cash flow issues. Understanding everything related to MSME loans and funding is important as MSMEs have to rely on external financing solutions in times of crisis.

3. Lack of Liquidity 

As a supplier to large organizations, most MSMEs are dependent on the success of these enterprises and the credit payment terms set by them. Delays in payments or a halt in the operations of their customers can reduce cash inflow and cause major liquidity issues for MSMEs. Most of the capital in an MSME goes into day-to-day operations, leaving the MSMEs cash-strapped when payments are delayed. To access enough capital for keeping the operations running, MSMEs look for the quickest and simplest funding sources. Since they only focus on funding daily operations, they do not have enough resources for long-term investments that can expand their businesses. The lack of liquidity can be eliminated with better financial literacy and MSME schemes that encourage high-return on investments.

4. Limited Access to Modern Financial Regulations

Despite government MSME schemes that resolve to make MSME funding easier, most regulatory loopholes still exist in this sector. The outdated regulatory practices keep the MSMEs from accessing financial assistance on time. Due to these regulations, the procedures for acquiring business licenses, insurance, and conducting tax assessments become complicated for MSMEs. Many MSMEs, especially in rural areas, do not possess the knowledge to use online platforms for conducting regulatory transactions. This further compounds the regulatory problems, leading to slow growth of small businesses. Due to the slow process of sourcing funds, many small businesses face obstacles with timely procurement of raw materials, accessing new technology and equipment, or even acquiring skilled labor.

Bridging the financing gap for MSMEs

How can supply chain finance accelerate MSME financing in India?

Supply chain finance (SCF) solutions can help MSMEs escape the vicious cycle of low profits, growth stagnancy, and high operational costs. The low-cost financing solutions under SCF can bridge the trust gap by providing lending institutions with tools to manage credit risk and expand the scope of financing to include the large segment of poorly-funded MSMEs. Here are some of the benefits of supply chain finance for MSMEs.

Immediate access to working capital

Supply chain finance can help MSMEs meet urgent working capital requirements and allow them to make early payments or have quicker access to funds that they are owed. Technology-enabled SCF platforms automate transactions, making it easier for MSMEs to track payments and access funding in a matter of hours. With such seamless and quick funding, MSMEs can easily invest in business expansion, procure new raw materials, or update their inventories.

Improved Liquidity

The government MSME schemes to minimize credit gaps in the sector focus on providing one-time, non-recurring funds. But MSMEs require a consistent flow of funds to meet the day-to-day operational requirements. As supply chain finance works on the basis of monthly invoicing, this financing tool can help MSMEs maintain daily cash requirements and offer improved liquidity, leading to a boost in their business growth.

Reduced Burden of Repayment

The loan payment terms under MSME schemes and supply chain financing are different. Under MSME loans, the rate of interest is lower, but the borrowers need to follow strict repayment schedules. On the other hand, there is no burden of repayment in SCF as the funds are provided as an advance against the invoices due to the MSMEs. The settlement of payment in such transactions can be directly collected from the buyers.

Supply chain financing platforms like Bizongo allow MSMEs to avail of advance payments against outstanding invoices from buyers with minimal interruptions to their production process. They enhance financial inclusion and enable MSMEs to have better access to diverse financing options at a lower cost. The landscape of MSME business financing in India is being transformed with technological advancements and funding alternatives like supply chain financing.  

If you are facing financial challenges and require support for your MSME, then Bizongo is the answer to your woes. Our supply chain financing solutions can help you meet your working capital needs in a cost-effective manner. 

Get in touch with us to know more.