India is set to become the third-largest economy in the world by 2027. As one of the three countries to generate $400 Billion annually, there’s no doubting the industrial boom. Entrepreneurs are leading this growth, but there are roadblocks to accessing the required capital.
Small business loan offerings, while readily offered online, are hard to avail. As per data, 50.7 million enterprises, i.e., nearly 80% of Micro, Small, and Medium Enterprises (MSMEs), lack access to this credit.
Even if they secure a working capital loan, their journey is marred by a number of hardships. Left unchecked, this lack of access will inhibit future growth. Read on to know more about the challenges that MSMEs face when acquiring a small business loan.
Limited Cash Flow
One of the foremost prerequisites to keep your business running smoothly is a seamless cash flow management strategy. It is overly challenging to see growth if your business does not have sufficient funds to keep its operations running.
Banks and NBFCs require businesses to have a regular cash flow in order to provide them with small business loans. A regular cash flow ensures the availability of funds at all times and also guarantees the lender that you may repay the loan.
When availing of a loan, lenders generally take into account your business’s debt-to-income ratio to approve your loan request. Hence, it is prudent for small businesses to keep this ratio high. It demonstrates to lenders that they possess enough capital to clear their dues on time.
Low Credit Score
Lenders also consider a borrower’s credit reports in order to determine whether to approve their loan request. If your business’ credit report contains details of irregularities in loan repayments, the lenders may hesitate to provide you with small business loans.
Hence, to acquire a working capital loan, you must maintain a good loan repayment track record. A good track record of loan payment is reflected in a credit score of more than 700.
So, if your business has existing dues, make sure to make your repayments on time. This ensures that your score, along with the business’ credit rating remains high. In such cases, there is a higher chance of securing a small business loan.
Lack of a Robust Business Plan
If you have a strong business model and you usually stick to it, there are high chances that a lender may approve your loan. In fact, apart from other types of documentation, lenders also require you to submit a detailed business plan.
A standard business plan contains information about your company, market, products, financials, and competitors. This allows banks and NBFCs to assess different factors contributing to any business’s success or failure.
By accounting for these factors, lenders can determine whether a business can pay back its dues in the future.
Lengthy Loan Process
The approval process for small business loans offered by banks and NBFCs is generally lengthy. This is because lenders assess your company’s financials at many levels, including
- The owner’s profile
- Business profile
- Business plan
- Credit ratings
In addition, lenders assess your company’s profits and losses before deciding on your loan request. Most MSMEs require working capital instantly when they are in need, and a lengthy loan process deters them from availing of this lending option.
Additionally, lenders may require specific documentation or have strict criteria for such instruments. One among these is the business vintage, wherein most lenders require companies to be in existence for 2-3 years.
Startups and small entities that need funding may fail to meet this criterion, and this often leads to a rejection.
Lenders Lack Trust in MSMEs
Generally, lenders are reluctant to provide lending to micro and small industries. This is because such businesses have small capital requirements, and uncertain cash flows.
As such, lenders can’t be sure about their ability to repay. Moreover, many MSMEs are considered high-risk because some might even lack a credit history. As such, lenders prefer to provide working capital loans to larger entities.
MSMEs are impacted due lack of availability of credit. However, the Reserve Bank of India (RBI) has taken numerous measures to help them access small business loans in the recent past.
For instance, the RBI has identified MSMEs as a priority sector that requires credit and financial assistance. This scheme fixed a sum to be provided as small business loans by banks to the MSME sector in a given financial year. Initiatives like these allow small enterprises to get unrestricted access to credit and focus on growth.
