As per a report, the value of lending market for Micro, Small and Medium Enterprises is estimated to be Rs. 14 lakh crore approximately. Another report suggests that the SME financing market is expected to grow further with an annual growth rate of 7%. But the loan availing potential of individual MSME units differs from different industries and clusters. In fact, a large number of studies claim that most MSME units find it difficult to avail MSME loans at the time of need.
Having said that, many new-age lending institutions are coming the market. They leverage latest technology and are thus called FinTech Companies (Financial Technologies). These companies have worked really hard to bridge the gap between SMEs and SME financing. They have accelerated the loan disbursement process and enabled small business units to get access to funds in a hassle-free manner. In addition, they offer innovative business solutions.
But the SMEs still face a few challenges to raise funds for their business. Let’s take a look at common challenges SME face while availing business loans in India.
Entrepreneurs to Turn Financially Literate
A number of studies indicate that the business owners in India are still not financially literate. They don’t track and understand the updates in financial technologies. Likewise, many small business owners still don’t consider NBFCs, and online lending options are safe and secure. Besides, they hesitate in applying for an SME loan online as they fear their information would be mistreated. It is important for the new-age lending institutions in India to make the entrepreneurs financially literate and inform them about the ongoing financial market trends.
Most loan lending institutions nowadays consider the monthly debit and credit card sales of a business to process the loan application. The Point-of-Sale (POS) system enable the borrowers to avail business loans by routing sales through POS machines. But many small business owners still don’t use online business transactions. The data provided by RBI (Reserve Bank of India) shows that there is a consistent decline in online/digital payment since don’t trust the online platform. Thus, small business owners don’t promote cashless transactions. Therefore, there is a need for lenders to invest in advanced financial technologies and promote technology-driven loan products without among the small business owners.\
Emphasis on Credit Score
While processing business loan applications, most loan lending institutes consider the business owner’s personal and business credit score. But today’s most significant percentage of online lending institutions that offer unsecured business loans to MSMEs who have excellent personal credit history and score. But many business owners lack the skills to improve CIBIL score and build a positive credit history. The SME owner must work on improving his CIBIL score and building credit history to let the loan borrower access his creditworthiness.
Cumbersome Disbursement Process
Many SMEs prefer traditional lending options over online lending options to avail business loans at low-interest rates. But the traditional lending option requires the business owners to meet their strict eligibility criteria including high CIBIL score and submit numerous documents. Besides, traditional lenders also take time in processing the loan application and credit funds into the borrower’s account. Hence, it becomes comparatively difficult to avail a loan for business from traditional lenders to meet urgent working capital needs and manage cash flow. Therefore, it makes sense to avail credit services from alternative lending institutions, such as NBFCs to efficiently reduce the loan disbursement time.
Non-standardised Project Appraisal
The lending institutions evaluate the risk in lending on the basis of a number of factors. This is why the eligibility criteria for different loan products differ. Some loan lenders even consider the business plan and the projects submitted by the borrower to assess the overall credibility of the borrower. However, there are no predefined rules or standards for project appraisal. This non-standardised or lack of standard eligibility criteria for evaluating the creditworthiness of the borrower makes it challenging for the borrower to prepare his application.
Often SMEs find it easier to get access to funds to expand their business. However, small business owners find it challenging to avail business loans that require hypothecating collateral to back the loan amount. They don’t have business property to hypothecate to avail a business loan. Many small business owners in India avail unsecured business loans from NBFCs which is offered without collateral. Thus, they are able to meet their requirements without pledging any asset.
In the end, the latest financial technology has changed the way through which the financial institutions in India operate. Now, the loan lenders are able to address the challenges faced by SMEs in India. Thus, they are helping them to avail SME financing without must hassle and delay. Hence, both, lenders are able to resolve the issues faced by SMEs and have also become a helping hand in the growth of the SMEs.