Overcome Top 5 Challenges of MSME Loans in India

The MSME (micro, small, and medium enterprises) sector plays a critical role in fuelling India’s economic growth. In fact, it is one of the leading contributors to the GDP (Gross Domestic Product) and a source of employment for millions of Indians. While the MSME sector is booming, many experts feel that it is still struggling to expand further and realise its full potential.

 

Although the government of India has launched several specialised schemes and initiatives to offer financial support to MSME businesses and spur their growth, they continue to face several challenges in getting access to the funds. In this guide, we explore the top 5 challenges faced by MSME businesses and how they can overcome them.

 

Challenge 1 – Lack of formal credit sources

 

Many MSME businesses, especially those based in remote and rural areas of the country, face one major challenge: They don’t have the means to get a loan or credit from a formal source because of inadequate banking infrastructure in the region. Consequently, these business owners feel forced to obtain credit from informal sources, which often come with great risks and high interest rates.

 

Solution

 

As an MSME business owner, you can overcome the lack of financial assistance from a formal source and look beyond the local lenders by exploring other options like NBFCs (non-banking financial companies). Nowadays, many NBFCs like Udyog Plus use modern technology and digital platforms to reach customers nationwide and provide a hassle-free platform for loan applications.

 

Also, these NBFCs and credit unions extend credit facilities under government schemes like Pradhan Mantri Mudra Yojana, etc. So, by embracing digital financial solutions and leveraging government initiatives, MSMEs can get access to formal credit sources.

 

Challenge 2 – Constantly changing business environment

 

Speaking of the problems of MSMEs, you cannot overlook the volatile nature of the business environment in India. Several external factors, such as market fluctuations, inflation, government policy changes, and economic trends around the world, affect the performance of MSMEs, which in turn affects their creditworthiness and their ability to secure funds/loans.

 

Solution

 

While the MSMEs cannot control the economic factors, they can surely mitigate its impact on their business by being proactive and having risk management strategies in place. They can take steps like building and maintaining a cash reserve, having a forecasting system in place, and implementing robust financial planning. This can significantly help businesses mitigate economic uncertainties as well as improve their creditworthiness, which will help improve their chances of getting a loan.

 

In addition, businesses can stay informed about government policies and new industry trends related to their sector. This will help them adopt new strategies and financial practices accordingly.

 

Challenge 3 – High Interest Rates on Loans

 

One of the most significant challenges of MSME business owners is that the interest rates charged by the lenders are quite high, especially when they borrow from local or informal lenders. Small businesses that operate on a limited scale with limited resources and finances, and with high interest rates find it hard to afford the borrowing cost.

 

Solution

 

MSME business owners can mitigate the impact of high-interest loans by comparing loan offers from different lenders and choosing the one that offers the credit at an interest rate that they can afford to repay. Also, MSMEs can take advantage of government loan schemes that aim to provide small business owners loans at subsidised rates. In addition, maintaining a good credit history and high credit score can help them get a loan at a lower interest rate and with favourable terms and conditions.

 

Challenge 4 – No collateral

 

Another significant challenge that MSMEs face when they apply for a loan is the requirement for collateral or security cover. Traditionally, lenders in India require business loan applicants to provide a tangible asset as collateral against the funds they want to borrow.

 

However, most MSMEs in India operate in an informal structure, and because they lack asset ownership, it is difficult for them to meet the MSME loan eligibility criteria.

 

Solution

 

Nowadays, many NBFCs like Udyog Plus offer unsecured business loans. MSMEs can explore such loans and take advantage of government schemes that don’t require them to offer collateral against the credit they avail. In addition, maintaining a strong credit history and transparent financial records can help them enhance their credibility, allowing them to get the loan without offering any collateral.

 

Challenge 5 – Financial illiteracy

 

Perhaps the biggest challenge that MSME business owners face in getting business loans is their own lack of financial literacy. Many small business enterprise owners have immense determination and grit to keep their businesses running but find it hard to understand complex financial concepts. This, in turn, often leads to imbalances in their working capital ratios, low credit scores and bad financial decisions, which impact their ability to get business loans.

 

Solution

 

To overcome financial illiteracy, MSME owners must focus on getting a thorough understanding of the financial market and its complex concepts. They can do this by seeking advice from experts, attending financial workshops, or even enrolling in formal courses. By improving their knowledge of finances, they can make informed decisions and even manage operations more efficiently. Not to mention, they may be able to understand the business loan process better and get their loan sanctioned without any hassles.

 

Final Word

 

Udyog Plus is one of the leading NBFCs in India. It aims to support SMEs by offering them unsecured business loans at the most affordable interest rates, starting at 8% per annum, with minimum document requirements and flexible repayment terms. It also provides a range of other business financial solutions specially tailored to suit the needs of SMEs in India.

 

As a business owner, if you are looking for a loan, you can rely on Udyog Plus to get the funds you need and take care of the business expenses. The flexibility to choose the repayment tenure; with the maximum tenure being 36 months and immediate sanction and disbursement, you can be assured of a smooth borrowing experience.