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Challenges in SME Financing in India

November 11, 2019
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4 minutes read
Challenges in SME Financing in India

Entrepreneurs require substantial capital to establish a business. Even when a business takes off and begins to grow, it needs extra funds to carry out its daily operations. There are a lot of financing options that can help entrepreneurs avail the required capital for business expansion. One of the most popular funding options is a small business loan. Business loans help Small and Medium Enterprise (SMEs) to grow and flourish. Although business loans are easily available, most financial institutions have stringent eligibility criteria for the same. This hampers the credit potential of SMEs to a large extent. Let’s have a look at some of the most common challenges faced by entrepreneurs while availing funds for their business.

  1. Requirement of excellent credit score

While processing a business loan request, financial institutions check the entrepreneur’s personal as well as business credit score. Small business owners with a good credit history stand a great chance of availing a business loan for SME financing. However, a large number of entrepreneurs are denied SME financing because of their poor credit score. Therefore, it is important for entrepreneurs to boost their credit score before applying for a small business loan.

  1. Cumbersome approval and disbursement process

Despite the increasing popularity of financial institutions and online lenders, many business owners still prefer traditional banks to avail credit at a low rate of interest. Applying for a small business loan with a traditional bank is a cumbersome process as it involves heavy documentation. Moreover, the loan approval and disbursement process in case of traditional banks are a lot more time-consuming. This keeps the small business owners from availing the credit on time to fund working capital needs or manage the cash flow of their business.

  1. Complex collateral requirements

Most lending institutions are hesitant in granting business loans to the newly established start-ups because of the high risk of lending associated with them. Therefore, lenders often ask business owners to pledge collateral while availing a small business loan. Small business owners are denied access to business loan if they fail to satisfy the complex collateral requirements set by the lending institutions. In order to avail the capital for their business, many entrepreneurs in India still opt for various schemes launched by the Government of India.

  1. Non-standardized project appraisal

Before approving a business loan to the entrepreneurs, lending institutions assess the total cost and the risk of lending through various parameters. Most lenders also evaluate the business proposal or projects submitted by the loan applicant before making their final decision of business loan approval. However, lending institutions do not follow predefined rules or standards for project appraisal. This makes it even more challenging for borrowers to prepare business plans to present it before the lending institution.

By making a note of all the above-mentioned challenges, and by preparing themselves accordingly, small business owners can increase their credit potential. It is always advisable to research various business loan offers provided by different financial institutions before availing a small business loan. This can help the entrepreneurs settle for a loan that best suits their needs. Lastly, borrowers should ensure to read the terms and conditions of the loan agreement carefully before signing it. This can be helpful in avoiding any inconvenience in the later stage.