MSME – The Challenges they face in Finance; Ways to increase the access and the sources of Financing.
MSME The Challenges they face in Finance; Ways to increase the access and the sources of Financing.
MSME stands for Micro, Small, and Medium Enterprises. They play a major role in the development of a country, by contributing 28.8% to the GDP, 33.4% to the manufactured outputs, and 45% to its exports. Their contribution to the overall economic growth of a country is an undeniable fact, but they also face a lot of challenges in the financial ground. They are the strong pillars in creating a self-reliant India and the vision of ‘Aatmanibhar Bharat’.
What are the challenges faced by MSME in Financing?
MSMEs primarily depend on the payments made by their buyers particularly, the large corporate buyers who make huge payments. But the delay in their payments adversely affects the small and micro-level business entities that face a major disturbance in their cashflows resulting in a financial crunch.
Small and Micro Businesses were hugely impacted due to the constant fluctuations in the market and in the changes in the taste and preferences of the consumers.
MSMEs are mostly from rural areas and lack the skills and tools for the trends of the market because of this they face an immense lack of promoting their products of which they face severe no credit funding which results in credit disbursal.
Low Growth on national wide reputation. Small business from urban areas has much access to immediately lean on the customer's tastes and match their products in fulfilling their needs, while rural small businesses take a little long and suffer limited access to capital funds as they may become outdated or never recognized by the money lenders.
MSMEs often lack in maintaining proper records of their accounts and filing tax returns and official business documents, that the bank asks for before granting potential credibility.
First-time borrowers face the most challenging circumstances in accessing enough funds and capital for their new startup due to the absence of their business history.
Some MSMEs may find it difficult to avail of loans due to strict collateral protocols and high interest on loans is also the biggest drawback that restricts many MSMEs from approaching the banks.
How to increase the access that finances an MSME?
The MSMEs should be aware of all the necessary steps to be taken ease to fund their capital and increase their investment in their startup business.
It is very important, for the MSMEs to first register under the MSME Act, of 2006.
In case of an MSME from the manufacturing sector will be recognized on the following basis:
Micro Enterprises – The investment is less than Rs.25lakh.
Small Enterprises – The investment is Rs. 25lakh and less than Rs. 5crore.
Medium Enterprises – The investment is Rs. 5 crores and less than Rs. 10 crores.
In case of an MSME from the service sector will be recognized on the following basis:
Micro Enterprises – The investment is less than Rs. 10lakh.
Small Enterprises – The investment is Rs.10lakh and less than Rs.2crore.
Medium Enterprises – The investment is Rs. 2 crores and less than Rs. 5 crores.
Once they get recognized as an MSME, they have to maintain enough documents that would be asked as proof while lending loans and funds from the bank and financial institutions.
It is also necessary that the MSMEs maintain a detailed retailed record of their sales history that provokes trust among the moneylender.
The MSMEs should keep a constant update on the subsidies and the grants that the Government provides specially for such small and micro-level businesses, which not just finance their business but also get recognized under Government regulations.
The MSMEs can easily access the credit guarantee schemes provided by the government with the help of the documents that vouch for their turnover and the investment basis that they fall under.
Women entrepreneurs who set up an MSME are widely encouraged which boosts their confidence. It is important for MSME to recognize such platforms and make use by implementing them.
Registration under GST enables cash-flow-based financing for MSMEs. GST registration plays a vital role in financing an MSME as they easily get recognized creating and creating a reputed image building trust among the customers and money lenders.
It is easy for the lenders to verify the claims of the business turnover, as it is transparent which makes the process efficient.
The MSME can receive its short-time credit through the Supply Chain Finance method which ensures faster credit disbursal among small businesses.
The NBFCs, Non-Banking Financial Companies lend more than the Scheduled banks that enhance a constant flow of cash flow that boosts the MSME to focus more on goal-oriented increasing their production.
What are the other sources that finance the MSME apart from the Governments?
Apart from the benefits that the governments offer the MSMEs, they are also funded from different global credit sources, which serves as the biggest advantage to MSME.
The World Bank Organization has extended its finance as MSME Emergency Response Program which enhances constant money and cash flow. They meet the immediate requirements of the Indian MSMEs and enable the process by easing the ongoing crisis.
SME lines of Credit provide dedicated bank finances and partial credit guarantee schemes, and funding sources like Fintech players and other digital lending sources within India. The Ministry of Micro, Small, and Medium Enterprises has launched a scheme to assist innovators in adopting new-age technologies and developing innovative and new products and solutions.
MSMEs need the right guidance, assistance in financial crises, budgeting, and strategic decision-making that will directly impact the financial success of the business.