Common Obstacles in SME Funding and How to Resolve Them

While SMEs are widely recognized as the growth engines of the Indian economy, they continue to grapple with various obstacles that hinder their growth and sustainability.

Funding is one such impediment that MSMEs frequently face. Many government projects and schemes are frequently launched and updated to help SMEs secure adequate financing for their businesses. However, funding continues to remain a major issue with these enterprises. The combined credit gap for the MSME sector is around Rs 1 trillion. This brings us to the question – why does SME funding remain an area of concern, and how to deal with it?

Common obstacles in SME funding

• Lack of Information

Most SME entrepreneurs remain unaware of various government lending schemes. They are also often intimidated by the details of schemes and the application process, which makes them reluctant to take advantage of such opportunities.

• Inability to Build Good Credit Scores

Like all other loans, credit scores are a vital part of the SME loan disbursement process. Many SMEs belong to the unorganised sector and have some recurring issues.

• They do not maintain accurate data of financial transactions.

• They depend on informal credit sources for procuring required loans that do not add up to their credit history.

These factors make them risky borrowers in the eyes of financial institutions.

• Absence of Proper Research and Business Plan

A good business plan backed with valuable market research and analysis is imperative for sanctioning the required loan. The lender would like to know where and how the money will be utilised.

However, many SMEs are reluctant to invest in valuable research. This can adversely affect their formal business plan, which may lack precise facts and figures to back up their loan estimates.

How to overcome funding obstacles

It is unfortunate that entrepreneurs, who overcome many troubles and challenges to set up and scale a business, get stuck in these mundane issues that are primarily bureaucratic.

SME owners need to change their mindsets and exercise a little more care while dealing with recordkeeping and accounting. They need to accept the fact that accounts and bookkeeping are an integral part of a business.

Furthermore, it is essential for every business to seamlessly integrate and deploy modern technology to remain relevant in a dynamic economy like India.

For instance, just because a firm can easily maintain the accounts and logistics manually doesn’t mean it should not upgrade to a computerised database management system.

Moreover, entrepreneurs should actively work towards attaining digital literacy. It can potentially open a plethora of opportunities and information for them.

Digitally literate entrepreneurs, as an example, would know where to look for information regarding loans. They can also reach out to fintech companies that work extensively in the MSME sector by providing solutions such as procurement of raw materials, purchase invoicing and lending to small businesses.

Tap the opportunity in the ‘chaos’

“In the midst of chaos, there is also an opportunity” – Sun Tsu

Every major crisis gives rise to new businesses opportunities that go on to challenge the established order. The Covid-19 pandemic, the subsequent lockdowns and the prevailing economic uncertainties can be the catalysts towards the next big economic turnaround. Indian SMEs must prepare themselves to embrace the impact and come out on top.