The micro, small and medium enterprises (MSME) sector in India contributes significantly to the country’s economy. In fact, it is a growth driver for India’s Gross Domestic Product (GDP) as a majority of the manufacturing units fall into this category and together employ a vast majority of the non-agricultural workforce.

And yet, raising money to expand or simply to meet their working capital requirements remains one of the single-biggest concerns for MSMEs. Here are the top five challenges when it comes to MSME business loans:

Collateral

Very often, lenders want owners of small businesses to furnish collateral to sanction loans. But this is often difficult for a business that is struggling to take off and whose founders may not have the assets needed to pledge.

The fact is, not many small businesses in India own assets that they can then hypothecate. This forces MSME owners to go in for uncollateralized loans, often at higher rates of interest.

Lack of trust

Lenders do not often trust owners of small businesses that are still struggling to take off. Moreover, banks are often disinterested in MSMEs since the loan amounts are very small and, therefore, inconsequential to their loan book.

Moreover, lenders often think that small businesses do not have the capacity to repay. As a result, MSMEs often face stricter scrutiny when it comes to borrowing as compared to bigger businesses.

MSMEs are also considered high-risk borrowers as they mostly do not have a credit rating to boot and are, therefore, often not eligible for a business loan.

Lack of financial literacy

They may be good businessmen and risk takers, but MSME owners often lack financial literacy. This becomes an impediment when it comes to borrowing money. They often end up making the wrong decisions, consequently leading to an imbalance in working capital ratios and low credit scores.

Also, since they do not understand the lending market, they may end up choosing the wrong lender and then paying a higher rate of interest. They also usually lack knowledge of the fintech space, which is making borrowing easier.

Excessive Regulations

MSMEs often have to face excessive regulation and scrutiny when it comes to borrowing money. They also have to contend with antiquated practices and with requirements like licences, certifications and insurance. This prevents them from sourcing money in a timely manner, which, in turn, impacts their growth.

Less than efficient disbursement

Often, owners of small businesses have to rely on traditional methods of lending, which require them to meet strict eligibility norms. They have to furnish documents which makes borrowing a lengthy and time-consuming process.

Moreover, the actual disbursal of money is itself a long and tedious process, leading to working capital issues. When small businesses are in urgent need of money, they find it hard to meet such stringent norms.

Conclusion

MSMEs in India face significant challenges in availing business loans. From collateral requirements to lengthy paperwork and a general lack of trust or interest among big lenders, MSMEs often struggle to take on business loans.

However, as newer forms of lending evolve and the market goes digital, things are becoming easier for MSMEs.