The Micro, Small, and Medium Enterprises (MSME) sector is the second-largest generator of employment in India. As per the MSME Ministry’s report in May 2021, there are over 6.3 crore MSME registered in India. These businesses are responsible for almost 49% of the goods and products exported from India. 

However, the lockdown of 2020 has significantly impacted the production, revenue, and day-to-day functioning of various MSMEs in India.

This article discusses the top seven challenges faced by MSME during and post-lockdowns and how they can be overcome.

7 Challenges faced by MSMEs in Lockdown

Fear of shutting down

A majority of MSMEs are facing difficulties and, as a result, fear shutting down completely. MSMEs are often required to jump through various hoops to comply with the regulations set by the government.

These processes are often lengthy and require several stages of documentation. The lockdown has delayed this process for MSMEs.

With all government bodies working at a reduced capacity, the simplest processes like GST registration take longer and are delayed. This means a process that would have originally taken two months can now take up to six or longer. 

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Lack of working capital

Most MSMEs have a low-profit margin because they are still solidifying their position in the market. This means startups often require regular income to stay open and afloat.

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The formal banking system can provide only a limited amount of loans to the business. Therefore, MSMEs are often dependent on the number of units they sell to determine their future.

Due to the lockdown, MSMEs have faced a major hit in their sales. Even with online and remote delivery options, there has been a significant impact on the supply chain, which may not be reversible.

This lack of working capital and MSME loan options is a major challenge for MSMEs.

Lack of access to workforce

Due to the lack of working capital, MSMEs can no longer provide the funds required to hire experts and professionals. Furthermore, MSMEs with funds can no longer hire professionals since many are unwilling to shift to a new city or travel to the same city to reach offices.

Instead, they have to settle with interns or unskilled workforce. This has created a major challenge for MSMEs.

The unskilled workforce reduces the overall productivity of the MSMEs and creates a major impact on the final product produced by the business.

Businesses have to apply for extra MSME loans to bridge the technological gap. This also affects the revenue of the business, making this a cyclic process.

Lack of technological access

Most MSMEs functioned in the brick and mortar model in the pre-lockdown world. The hiring or small offices allowed the entrepreneurs to keep track of each employee and ensure productivity was on track.

However, due to the lockdown, businesses have no option but to adapt to the virtual model. This creates a problem for businesses that don’t have access to technology.

Furthermore, entrepreneurs also have to provide internet budgets to their employees. This creates other challenges for the business.

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Lack of work-life balance

In the virtual working model, MSME employees have to work longer hours to ensure the same level of productivity as they did in the pre-lockdown world.

These longer working hours disrupt the work-life balance of both the employees and the entrepreneur.

Furthermore, the worry of whether or not the business is shutting down has forced entrepreneurs to abandon the nine-to-five working model of companies and instead look at other avenues to increase the productivity of the business. 

Freeze in funding

MSMEs that have applied for business loans are facing funding issues. Due to the lockdown, several banks and funding institutes have put MSME loan applications on hold.

MSMEs that have been approved for a loan have been placed on the ‘pending’ list until further notice. This lack of direction has caused several MSMEs to look at other ill-advised avenues, which may affect their credit score in the long run.

Furthermore, this change in CIBIL score also makes it difficult for the business to continue with the loan applications that they have already applied for.

Unaffordable interest rates

Due to the lockdown, as aforementioned, banks and financial institutions have put MSME loan applications on hold. However, those that do provide loans are now doing so at higher interest rates.

For several startups, these interest rates may as well be affordable. Even though lockdown restrictions have eased, the interest rates for business loans have not come down. As a result, businesses have to choose between getting a loan with an unaffordable interest rate or risk shutting down.

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What are the solutions?

These seven challenges listed above are closely interlinked. The root cause of the problem for each comes down to finances. Without good finances, MSMEs cannot hire a workforce, maintain productivity and increase sales.

This reduces their revenue and their credit score. Furthermore, the freeze in funding and unaffordable interest rates make it difficult to break the cycle. 

However, the answer to breaking this cycle is getting better funding. To obtain funding from reliable sources with affordable interest rates, MSMEs can do two things:

Rethink the business plan

A new business plan, vision, and goals need to be implemented if MSMEs want to stay afloat. It cannot be said conclusively how long the effects of lockdown will last.

And instead of fighting these changes, MSMEs should adapt their business plan to the newer, digital world. A good business plan can influence a financial institution to reconsider the MSME loan application before you apply for MSME loan.

MSME loans

Various financial institutions provide collateral based MSME loans. These may not be the most favorable options, but they will make a significant difference in the interest rates offered to them for the loan.

However, in this option, the entrepreneur may have to provide some personal assets as collateral. On the other hand, several institutions provide unsecured loans. All MSMEs can avail these for a shorter period.

One such example is Ziploan. Ziploan provides funding for businesses in various sectors and locations in India. You can find out more about this MSME loan option by visiting their website.

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