July 1

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Top 5 Challenges for MSME Business Loans


Small and medium-sized businesses (MSMEs) in India have played a significant role in the country’s economic growth during the past few decades. MSMEs or micro, small, and medium-sized enterprises constitute the backbone of India’s economic growth and development.

Amidst a pandemic that has halted major economies worldwide, India’s Government offers support and assistance to ensure that MSMEs’ growth continues unhindered through various programs, particularly through MSME loans. However, the lack of timely and appropriate access to MSME loans and financing remains the major challenge for this sector, which has impeded its growth despite its significant economic contribution and support from the Government.

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Challenges for MSME business loans

Obtaining a loan for a small business is difficult for MSMEs because of the following reasons:

Collateral for SME Loans

No matter how hard the Government tries, many firms still have trouble securing funding or receiving an MSME loan online despite its efforts to make credit for companies more widely available. Small businesses may have difficulty obtaining an MSME loan due to the lending institutions’ tight policy on collateral.

In addition, an MSME loan can be difficult to secure if a small business doesn’t have the essential assets. Crafts such as weaving by hand, art, and marble and stone carving are common among MSME enterprises. Even though these industries are gaining footing in the international market, banking institutions do not step forward to provide the essential support through MSME loans to these enterprises, given their limited infrastructure and capital investment.

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The economic recession has resulted in a lack of liquidity, which is a major concern. In light of COVID-19’s effects, the MSME sector has significantly dropped in revenue generation, putting micro and small firms at risk. As a result, demand dropped dramatically, and there was a severe shortage of funds in the business.

Furthermore, the MSME loan application process for small business loans becomes more cumbersome in this situation. As a result, it is not feasible for small businesses to take advantage of this funding option when they urgently need MSME loans to meet working capital needs.

Lack of Access to Current Financing Alternatives

The Indian Government offers a wide range of financial aid programs, yet there are substantial regulatory barriers to accessing these programs. In the early stages of their business venture, most MSMEs encounter fundamental financing issues. Obtaining licenses, insurances, certifications, and several other regulatory requirements can take long for small and medium-sized businesses (SMEs).

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In addition, the lack of trust and unfamiliarity with technological systems means that many small businesses do not use commercial transactions based on technology.

Furthermore, traditional lenders have failed to keep up with MSMEs’ changing needs and capacities in recent years. Owners of small businesses must meet a long list of qualifications and produce a plethora of supporting documentation to apply. Unlike the MSME loans, their lending alternatives are limited in payment structure and repayment length.

Moreover, such lenders typically demand collateral in the form of an immovable property, which effectively closes the door for MSMEs seeking financial assistance.

A lack of financial knowledge

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In many cases, MSME business owners lack the financial literacy to make sound business decisions as they develop new strategies and prepare for the growth of their existing businesses. Poor credit scores and working capital imbalances are often the results of this. When applying for MSME loans online, MSME entrepreneurs that lack basic financial knowledge may be unable to make critical business decisions, such as selecting a suitable loan structure.

Choosing the wrong lender might lead to higher interest rates on small business loans. A firm understanding of financial matters is essential for business owners reliant on an MSME loan in case of a financial setback. One can make terrible decisions that cost the organization a lot of money if they lack financial skills. Because of this, they cannot keep up with NBFCs and internet lenders, which are using the most modern financial advances.

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Therefore, MSMEs seeking business financing and MSME loans must be updated on financial matters by both the public and commercial sectors. When it comes to MSME loans, it’s essential to understand all the details, learn about interest rates on MSME loans, and compare them to the market before obtaining a loan.

Institutions of Credit Lack Trust in lending money to small and medium-sized businesses

There are concerns about the ability of MSMEs to repay their loans because the capital requirements for MSME loans are so low. Due to this scenario, banks adopt stricter conditions for start-ups to receive MSME loans online.

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For this reason, financial institutions must keep an eye on and interact with MSMEs throughout the payback life of their MSME loans because they have little or no credit history. They view it as a significant expense for their firm. A company’s ability to receive an MSME loan is also harmed when its credit rating isn’t updated. Dissatisfaction among small business owners is exacerbated by the lengthy approval process for MSME loans.

The use of out-of-date technology

Despite government attempts and the rise of the FinTech industry, most small and medium-sized enterprises (SMEs) in rural areas remain unaffected by technological and regulatory changes. Moreover, it is difficult for MSMEs to secure funding and loans because of outdated technology and the lack of experienced workers.

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As a result, most businesses face difficulties with manufacturing, timely purchases of raw material, and even access to new technology or the learning of new skills.

Small and medium-sized businesses (SMEs) must be aware of technical improvements critical to their success. Researchers must be involved in local MSME clusters and pay attention to the challenges and issues they face in technology. As long as there are inefficiencies and inequalities in the system, regulatory improvements will not benefit the targeted MSME goals.

Final thoughts

MSMEs play a critical role in the Indian economy, which cannot be overstated. Approximately 29% of India’s GDP comes from MSMEs doing business on a national and international level. But this industry has traditionally had a hard time achieving both broad-based and sustained growth. Excess debt and tight MSME credit policies continue to stifle the growth of Indian entrepreneurs. The Indian Government’s support for the MSME sector has been critical, but a new phase of stricter rules and improvements in MSME credit offerings would make the MSME sector an essential part of the Indian economy.

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