Challenges for MSME Loan

Top 5 Challenges for MSME Business Loans

March 20, 2022 • 6493 views
Author: PoonawallaFincorp Category: Business Loan

In India, the MSME sector (Micro, Small and Medium Enterprises) is an important source of growth, contributing significantly to GDP and employing millions of people. One of the main challenges faced by MSMEs is financing the expansion, something that also keeps the industry from realizing its full potential. Although new government policies and programs are trying to fund several of MSME owners’ business requirements, a few challenges to accessing MSME loans remain.

MSMEs generate mass employment in all parts of India and are vital to the country's progress. Given their importance, the Government of India provides support and assistance with various programs to ensure that MSME growth continues unabated, especially with MSME loans, during the global economic crisis. Despite their significant economic contribution and support from the Government, the lack of adequate and timely access to MSME lending and finances remains a major test for the sector, which has hampered their development.

Top 5 Challenges Faced by MSMEs in India Accessing MSME Business Loans:

1. Lack of Confidence in Providing MSME funding

Banks are reluctant when it comes to MSME funding as their financial requirements could be of a low-ticket size, and they are unsure about MSMEs’ repayment capabilities. Banks usually adopt strict eligibility and approval criteria to provide MSME loans because of this confidence crisis. Because MSMEs may not have a credit history, they are considered to be high-risk; They consider such loans a high cost to their business. In addition, businesses often fail to maintain their credit ratings, thus affecting their ability to access MSME loans. Also, the long process of approving MSME loans adds to the dissatisfaction of small business owners.

Some businesses fail to keep track of their credit ratings which undermines their ability to get a loan. In addition, standard lending options make it difficult for business owners to meet strict eligibility requirements without the long-term MSME loan approval process which is extremely stressful.

2. Lack of Collateral for Loans

Some small businesses may find it difficult to get an MSME loan because of a strong collateral requirement. However small companies may not have the space to guarantee loan repayment terms, and business owners may choose to borrow unsecured Business Loans from lenders where they do not have to worry about providing collateral or assets to obtain loan approval.

Despite the Government's efforts to make corporate debt freely available to small businesses, many businesses face difficulties in securing funding or access to MSME loans. Due to the strict collateral policy of lending institutions in providing MSME loans, small businesses may find it difficult to secure MSME loans. Small businesses may lack the necessary resources to secure access to MSME loans. For example, many MSME industries include regional businesses such as handicrafts, art, marble, stonework, etc. Although these industries are booming in the international market, banking institutions are failing to provide much-needed support for MSME lending.

Despite these challenges, business success is achieved with determination and these problems of MSMEs can easily be solved if you get the right support from creditors.

3. Inadequate Financial Education

Aside from displaying amazing business acumen, many MSME business owners do not have the financial knowledge to make sound business decisions. In many cases, this can lead to higher operating costs and lower debt scores. In addition, failure to choose the right lender leads to higher interest rates on small Business Loans. They are not up to date with the latest financial technology used by many NBFCs and online lenders.

This often leads to unequal working rates and bad credit scores. MSME entrepreneurs who do not have basic financial knowledge may not be able to make critical business decisions about finances, for example, choosing the right loan framework when applying for an MSME loan. The high-interest rate on loans for small companies is the result of an inability to choose the right lender.

As a result, it is important to understand everything about MSME loans, learn about MSME loan interest rates, and compare them with the market before taking out a loan. Even if entrepreneurs continue to develop new strategies and plan to expand their existing business, there are still many entrepreneurs who do not have the financial know-how to steer the business in the right direction.

Also Read:- How To Apply for MSME Loan Online? - A Detailed Guide

4. Lack of Modern Financial Solutions

Some problems of MSMEs include the impact of older management systems that require small businesses to obtain licenses, insurance, certificates, etc. Due to those laws, MSMEs are barred from receiving timely funding. However, many small businesses do not use online business transactions due to a lack of trust and unfamiliarity with technology. Regulatory gaps that cause delays in obtaining licenses, insurance, and certificates also hamper MSME opportunities.

5. Outdated Technology

Many businesses fail to reap the benefits of the latest technological advances in their sector due to a lack of knowledge and awareness. MSMEs, therefore, need to be informed of technological advances that are critical to the growth of their businesses. Scientific research themes must stay in touch with local MSME collections and be aware of their technical problems and issues.

Despite government programs and the emergence of FinTech businesses, many MSME businesses remain unaffected by technology development and legal development, especially in rural areas. MSMEs are also plagued by outdated technology and a lack of skilled staff when they present strong reasons for earning and receiving MSME loans. Due to a lack of funding, many firms have problems with production, timely purchases, and access to new technologies or acquisitions of new skills.

As a result, MSMEs should be aware of technological advances that are critical to their success. Research institutes should be linked to local MSME collections and consider their technical difficulties and problems. The development of regulations will not serve its intended objectives if inefficiency and inequality remain in the system.

At Poonawalla Fincorp, we understand the unique financial needs of MSMEs and the challenges they face in accessing funding. To help small businesses grow faster, we offer MSME loans. Apply now If you would like to avail of a Business Loan from Poonawalla Fincorp, tailor-made to suit the needs of smaller businesses.

Apply for Business Loan

How Can Supply Chain Finance Accelerate MSME Financing in India?

Supply chain finance can play a crucial role in accelerating MSME financing in India by addressing some of the key challenges faced by these businesses. Here's how:

  • Improved Cash Flow: Supply chain finance allows MSMEs to access early payments for their invoices, enabling them to bridge the cash flow gaps that often arise due to longer payment terms from buyers. This improves their working capital position and provides them with immediate funds to meet their financial obligations and invest in business growth.
  • Lower Cost of Financing: Supply chain finance programs often provide MSMEs with access to financing at lower interest rates compared to traditional borrowing options. By leveraging the creditworthiness of the buyer or the supply chain ecosystem, MSMEs can benefit from lower borrowing costs, reducing their overall financing expenses.
  • Enhanced Credit Access: MSMEs, especially those with limited credit history or collateral, may struggle to secure traditional financing. Supply chain finance leverages the strength of the buyer's credit rating, allowing MSMEs to access financing based on the buyer's reputation and creditworthiness. This expands their access to credit and increases their chances of obtaining affordable financing.
  • Mitigation of Credit Risk: Supply chain finance programs often involve collaboration between buyers, suppliers, and financial institutions. This collaboration helps to mitigate credit risk by providing transparency and visibility into the financial health and performance of suppliers. Lenders can assess the creditworthiness of suppliers based on their relationship with the buyer, reducing the risk associated with lending to MSMEs.
  • Integration of Technology: Supply chain finance solutions often leverage digital platforms and technology to streamline processes, reduce paperwork, and improve efficiency. This can enhance the ease of financing for MSMEs, reducing the administrative burden and enabling faster access to funds.

By leveraging supply chain finance, MSMEs can unlock opportunities for growth, improve cash flow management, and access affordable financing, thereby accelerating their overall development and contribution to the Indian economy.


Q.1: What are the challenges faced by MSME?
Various business finance options are available for Micro, Small, and Medium Enterprises (MSMEs). However, some common challenges MSMEs face do not allow them to avail of funds. Some of these challenges include inadequate working capital, insufficient bureau score, and lack of documents required for Business Loans. 

Q.2: What are the problems with MSME financing?
MSME financing has evolved over the years to make it easier for entrepreneurs and small business owners to avail of funds when required. Many lending institutions are simplifying their loan application process to reduce the common challenges faced by MSMEs. They offer collateral-free MSME loans at attractive interest rates, with minimal documentation, and easy-to-fulfil eligibility criteria. 

Trending Topics

Contact Us logo Quick Apply CIBIL Score logo Free CIBIL Whatsapp logo Connect on WhatsApp