MSME Loans: Factors That Affect Loan Availability
The SME and MSME sector has been a powerhouse of growth for the Indian economy for years now. However, these entities call for adequate funding constantly to stay operational and afloat in today’s competitive market. Unfortunately, businesses face an obvious lack of finance despite the continuous and proactive efforts of the Indian government. But why does this disparity exist? Let’s understand the factors concerning businesses to avail a business loan.
Factors Limiting Businesses To Avail Funds
1. Low Credit Score
Recent studies show that only 30% of business owners receive formal credit in India. Needless to say, a majority of SMEs remain under-financed or avail financing through informal sources. As a result, these entities do not possess a healthy credit score. Additionally, most of these businesses operate in the unorganized sector and do not hold considerable data on their transactions. Therefore, it becomes difficult for financial institutions to assess the creditworthiness of these organizations. Consequently, investors perceive them as risky borrowers and hesitate to extend funds.
2. Location of The Business
The ability to acquire funds by a firm is often traced to the ease of doing business in a given region. For instance, organizations conveniently placed in economic and financial hubs of India gain easier access to business funding solutions. In other words, enterprises based in prime locations benefit from a wide range of resources, including credit. However, this is not the case for most businesses, which consequently miss out on several growth opportunities due to their remote location in the country.
3. Lack of Clarity In Business Plan
While requesting credit, financial institutions require a concrete business plan to assess a company’s credibility. But in most cases, SMEs fail to project a clear plan of action. At times, SMEs struggle to project a feasible growth trajectory and fail to convince financing institutions to approve their funding request.
4. Insufficient Credit Information
Over the years, the government has rolled out many schemes for boosting small and medium enterprises, such as Pradhan Mantri MUDRA Yojana (PMMY) and Credit Guarantee Fund Trust for Micro and Small Enterprises. Unfortunately, there exists a vacuum in the transfer of information, referred to as an information asymmetry problem. As a result, only a handful of these schemes ultimately reach the intended recipients.
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5. Lack Of Technological Upgrade
Today’s world requires businesses to be tech-savvy to operate and flourish. However, SMEs are losing their position by not utilizing technological advancements adequately when it comes to business expansion and growth. Contrary to popular belief, top technological trends are not just developed for larger businesses and can be easily scaled according to the user’s needs. For instance, an SME can use cloud-based accounting tools for optimising its invoicing and settlement processes. It can also expand its market reach by offering peer-to-peer (P2P) payment options through mobile wallets and applications.
The factors mentioned above discourage business owners from availing a business loan, thereby hindering business growth. However, an SME can always opt for other sources of a business loan, such as working capital finance for procurement of raw materials. It allows businesses to avail funds to purchase raw materials for business requirements.
In Summary
SMEs in India are growing in a myriad of sectors, such as manufacturing, agriculture, and the service industry. Through effortless access to a business loan and working capital finance, these enterprises can further accelerate their growth and become self-sustainable in the long run.