In India, the MSME (micro, small and medium enterprises) sector is an important growth driver, contributing significantly to the GDP and employing millions of people. A significant area of concern for many such businesses is financing for expansion, something that also keeps the sector from realising its full potential. While new government policies and initiatives are certainly trying to bridge the credit gap, several challenges for securing MSME loans still remain.
Let’s take a look at the top 5 challenges of SME loans –
1. Inadequate Financial Literacy
Despite displaying an incredible entrepreneurial grit, many MSME business owners don’t possess the financial literacy to make the right business decisions. Often, this can lead to imbalanced working capital ratios and low credit scores. Moreover, a failure in choosing the right lender leads to higher interest rates on small business loans. What’s more, they aren’t up-to-date with the latest financial technologies that many NBFCs and online lenders use. Therefore, both the public and private sectors must take steps towards making MSMEs looking for business loans financially literate.
2. Lack of Modern Financing Solutions
Another problem with MSME loans is the impact of antiquated regulatory practices that require small businesses to acquire licenses, insurance and certifications, etc. Due to such regulations, MSMEs are prevented from sourcing financing on time. However, many small businesses don’t use online business transactions due to a lack of trust and unfamiliarity with technology.
3. Trust Deficit
Banks usually shy away from extending SME loans since they typically involve small amounts. Moreover, banks believe MSMEs don’t have repayment capacity and, thus, apply stricter regulations on these businesses. Also, since MSMEs are likely to have no credit rating, they pose as high-risk borrowers, further impacting their business loan eligibility.
4. Cumbersome Disbursement
Traditional lending options often require business owners to meet strict eligibility criteria along with furnishing a variety of documents. What’s more, the loan processing and subsequent crediting of funds for such small business loans is a long and tedious process. When MSMEs are in urgent need of SME loans to meet working capital needs, this financing route is not viable. This issue is why many are now making the shift to alternative lending institutions such as NBFCs that are quick with loan disbursement and have relaxed eligibility criteria.
5. Collateral Requirement
Often, strict collateral requirements come in the way of small businesses availing MSME loans. Not many small companies own assets such as property to hypothecate. This is why many small business owners prefer unsecured business loans from lenders that don’t require them to pledge any assets for securing financing.
So, there you have it; the most significant challenges of SME loans. However, there is no need to fret! Such problems can easily be bypassed by choosing the right lender.
At Tata Capital, we understand the unique capital needs of MSMEs and the challenges they face in securing funding. To help small businesses grow quickly, we offer unsecured MSME loans that are easily accessible and require no collateral. If you’re interested in taking out an SME loan at Tata Capital, visit our website and calculate your EMIs using our business loan EMI calculator. Get in touch today!