Solutions To 5 Challenges Faced By The MSME Sector While Availing Loans

Micro, Small and Medium Enterprises (MSMEs) have proven to be the backbone of the Indian economy, mushrooming across various industries and making a significant contribution to the employment generation in the country. In the wake of Digital India, many start-ups are cropping upwith a lot of government supportthat favour their growth. While steps have been undertaken to encourage growth of this sector, many small business owners still struggle to arrange funds for their organizations. Right from injecting capital to meeting operational expenses, monetary funds are necessary for running a business successfully.

Listed below are some of the challenges faced by small business owners and their solutions -

1. Lack of a good business plan

Many small business owners do not know how to present a convincing project plan that will attract lenders. Financial institutions need to see the plan to assess how well your business will perform and your ability to repay the loan.
 
Hence, you need to present a detailed plan that projects expenses as well as the ways to mitigate risks in case of any unforeseen event. So, try and develop a target-based plan that maps your organization’s growth chart and future opportunities, considering the current market landscape. Seek help from a project planner if need be, who can chart a plan that is transparent and logical enough for lenders.
 
        Also Read: 10 takeaways from Budget 2020 for the MSME Sector
 

1. Inefficient management of cash flow

Most small business owners struggle to manage their receivables and payables. And this poor cash flow management can not only make it difficult for you to stay afloat, but also diminish your credit worthiness in the eyes of lenders. They might charge you a higher than usual interest rate.
So,monitor your cash flow regularly, cut costs wherever possible and sell assets that you do not need for quick funds. Sell dated utilities (like fax or Xerox machines if you mostly communicate online) and try to negotiate your lease terms. If your employees mostly use mobile phones, cut down on landlines. Send invoices on time and follow up for payments closely. Use mobile payment apps to receive funds faster. You can also ask for partial payments in advance for large orders.  
 

1. Long processing time

Despite measures taken by the RBI to ensure that the funding for MSME sector is encouraged, many traditional institutions still have a conventional approach that involves a lot of paper work, making the approval process lengthy and cumbersome. During this period, you might lose some golden opportunities, merely due to lack of funds.
So, seek funding from financial institutions that typically require less documentation, have an online application system in place, and approve instant loan quickly. In case of secured loans, lenders usually need more time to assess its value before sanctioning the loan amount.

        Also Read: Impact Of Covid-19 On Indian SMEs And Strategy To Reboot The Sector    

 

 

1. Lack of security or collateral

Small business owners usually do not have any valuable asset to offer as collateral to traditional institutions, which makes it difficult to secure a loan. Also, conventional lending institutions are often unwilling to lend funds to startups, if they have already availed funding from other sources.
In such cases, you can seek collateral-free loans from modern financial institutions. However, make sure you have a decent credit score, low debt to income ratio, and a detailed financial plan to avoid refusal.In absence of collateral, the lender will check your credit history to make sure you can repay the loan. If you opt for machinery loan, the machines themselves will be considered as collateral.    
 

1. Unaffordable interest rates

Loans offered by traditional financial institutions usually come with high interest rates and additional charges, especially if you are a new business or lack collateral. Also, managing the monthly instalments can cause a lot of stress.
So, small and medium business owners should compare multiple lenders, especially the modern ones, to zero in on the interest rate and tenure that are best suitable for them. As a thumb rule, if you choose a long tenure, your interest rate and EMI will be low. However, your long term interest cost will be high. Another way to negotiate on interest rates is to maintain a good credit score. Ask for a loan amount that you actually need, as high loan amounts will attract high interest rates.

        Also Read: Relief Measures That Are Helping MSMEs Tide Over The current Crisis

To conclude
Small businesses can seek funds from forward-thinking lenders who understand their unique challenges and offer tailor-made solutions. All in all, to be on the safe side, always try and maintain a high credit score, keep your cash flow positive, have a solid business plan in place and compare different lenders before deciding to go with one.