Micro, Small & Medium Enterprises (MSMEs) play a crucial role in growing the Indian economy by boosting its GDP and generating vast opportunities for many people. While MSMEs contribute significantly towards strengthening our economy and the governments also encourage the development of this sector, they still have to face numerous hurdles while arranging sufficient capital to keep their processes running and attain their full potential.
Like large-scale businesses, MSMEs also need a substantial amount of money to buy the latest machinery, meet operational expenses, purchase new office space, or build a new website to promote their product or enterprise. Regular cash flow is reasonably necessary for running a business successfully. Even though one can easily apply online for an MSME loan to acquire sufficient funds, they still encounter several obstacles along the way. While various financial institutions offer affordable MSME loan interest rates, lack of financial awareness and collateral are critical hindrances that pose difficulty in obtaining the required lump sum of money.
Read on to know more about the five obstacles that confront MSME loans in India.
- Collateral or security requirement
More often than not, the money-lending institutions demand collateral instead of the MSME loan amount. To pledge a valuable asset such as property, gold, securities, etc., means giving away its control over to the organization until the loan is completely paid off along with interest. To avoid such a situation, business owners steer straightforward MSME loans and look for an unsecured form of credit through other lenders with flexible repayment tenure. Although a loan without collateral could be charged at a higher interest rate, you could repay the amount through EMIs without worrying about losing the asset.
- Absence of modern financing solutions
A fundamental struggle faced by entrepreneurs with MSME loans is the mandatory regulations imposed on small enterprises to obtain practice licenses, certifications, insurance, etc., beforehand. Due to such time-consuming processes associated with starting or expanding a business, they cannot acquire the capital on time and realize their full potential. Another hurdle faced by small enterprises is the lack of technological understanding of performing business transactions online, which shall help them increase the revenue and get the MSME loan application online more quickly.
- Inability to maintain the proper balance
While the emerging entrepreneurs show a great deal of promise and competency in their business ideas and skill, they lack a specific financial awareness to execute their plans with finesse. Whether it is a small or large scale business, each one requires initial capital investment, the latest machinery or equipment, some inventory management, and daily working employees or labourers. Hence, business owners may feel engaged with many avenues at times and make wrong choices in finalizing a lender that may charge a higher rate of interest.
- Tiresome process
An MSME loan application online from conventional sources could be a tedious process for entrepreneurs involving a lot of paperwork and submitting various relevant documents such as identity proof, income proof, ITR returns, business profit statements, etc. In addition to it, the stringent eligibility requirements faced by aspiring business owners while applying for MSME loans are also a discouraging factor while they are trying to find their feet and start an enterprise. Hence, entrepreneurs are not particularly excited about MSME loans and try to obtain the necessary funds through other avenues that involve flexible eligibility, less documentation, fast processing, and quick disbursal.
- Lack of trust
Last but not least, many financial institutions are not enthusiastic about placing their faith in small businesses due to their small or moderate funds requirement. Along with it, they are also not confident about the debt-repayment capacity of emerging entrepreneurs and try to enforce a high MSME loan interest rate upon them, categorizing them as high-risk borrowers. Subsequently, it affects the credit rating of MSMEs, forcing them to look at other sources for obtaining the necessary capital.