Challenges for MSME Loan

Top 5 Challenges for MSME Business Loans

March 20, 2022 • 14717 views

In India, the MSME sector (Micro, Small and Medium Enterpises) is an essential source of growth, contributing significantly to GDP and employing millions of people. One of the major challenges faced by MSME 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. Let’s read about the top 5 challenges faced by MSMEs in India. 

Top 5 Challenges Faced by MSMEs in India Accessing MSME Business Loan

These are a few common problems faced by MSME business owners when availing of a Business Loan:

1. Lack of Confidence in Providing MSME Funding

Lenders have limited trust in MSME business owners as they perceive a high risk involved while financing their endeavours. This feeling is often a justified reason as MSMEs often lack a sufficient credit history, and their capital requirements are typically low.

Therefore, to check the number of loan applications, lenders often set strict eligibility criteria. This is one of the biggest MSME problems regarding securing instant cash remedies.

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 loan. 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.

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2. Lack of Collateral for Loans

As discussed before, most lenders set strict collateral terms for MSMEs. Whenever opting for a high-ticket loan, the lender may ask for policy collateral to reduce their risks. This serves as a setback for small business owners as they do not have adequate resources that can serve as collateral.

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

A lack of financial education often makes it a barrier when business owners attempt to leverage the existing opportunities in the economy. Over the years, this has been among the major challenges faced by MSME loan seekers as they have made improper decisions in haste.

Directly, their actions had a negative impact on the business’ profitability and increased the overall operating costs. Lacking knowledge in the core business sector makes it difficult for someone to shortlist the right lenders, leading to costlier loans.

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 CIBIL Score. 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 licences, 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 licences, 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, most problems of MSME units involve 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.

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:

1. 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 immediate funds to meet their financial obligations and invest in business growth.

2. 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.

3. 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.

4. 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.

5. 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.

Also Read: Importance of MSME Loan for Small Business Owners

How Can You Overcome the Challenges faced in the MSME sector?

These are five helpful tips that you can follow to tackle the most common disadvantages of the MSME sector:

  1. Try to instill strict financial discipline by operating within the budget.
  2. To maintain continuous cash flow and look forward to eliminating unnecessary expenses.
  3. In the age of digitisation, more focus should be towards automating the processes for which different software and hardware solutions need to be explored.
  4. Maintain a flawless credit report to access loan offers easily.
  5. Finally, approach NBFCs and other microfinance institutions for loans instead of banks as they put forward relaxed eligibility criteria.

Understanding Business and Personal Credit Score

While approving MSME loan requests, lending institutions consider both personal and business credit scores as critical parameters to determine loan eligibility. It gives them a fair idea about the likelihood of timely loan repayment.

Thus, as an MSME business owner, you should be careful while handling EMIs. Delaying any payment will lead to a lowering of the credit score thus implying a higher risk of defaulting on the loan repayment.

To maintain and gradually improve the credit score of your business as well as your Personal Loan account, follow these tips:

  1. Maintain a low credit utilisation ratio (typically less than 30% of your approved limit).
  2. Limit your credit inquiries, as that can make a lender assume your business is not performing well.
  3. Do not close old loan accounts, as they serve as a track record of your past repayments.
  4. Maintain a healthy balance between secured and unsecured loans.
  5. Finally, keep tracking your repayment history at regular intervals to check if there are any discrepancies that can possibly influence your credit score.

To Conclude

Amidst the major challenges faced by MSME business owners, the most alarming issue is when someone selects unfavourable loan terms. It slowly deteriorates their credit score, and the credit management practices also go out of control. Thus, you, as a business owner, can choose Poonawalla Fincorp for a personalised Small Business Loan and borrow only the bare minimum that your business requires.


  • What are the challenges faced by MSMEs?

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.

  • 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 loan at attractive interest rates, minimal documentation, and easy-to-fulfil eligibility criteria.

  • What is the minimum credit score for MSME loans?

For MSME loans, lenders expect a credit score of 700 or above. However, apart from the credit score, your business’s financial stability and credit history are also taken into consideration while determining loan eligibility.


We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Business Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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