MSME Blog

Alternative Lending Options Fuelling MSME Growth in India

It is no secret that the economy of a developing country like India is fuelled largely by small and medium enterprises. The Indian business landscape is home to more than 43 million SMEs providing 40% (nearly 11 crores) of the employment and contributing to at least 30% of the Gross Domestic Production. Despite these overwhelming statistics, these micro, small, and medium enterprises face untold challenges in acquiring the financial resources to fund their growth.

MSME Funding: What’s The Reality of the Situation?

Yes, MSMEs have had their potential cut short because of one main reason: Traditional lenders are reluctant to direct funds toward this sector. Therefore, to replace shortfalls in working capital and cash flow, MSMEs must invest their time and limited resources into shoring up funds at high costs.

The lack of financial information and paper-based, informal business practices contribute to India’s lack of access to finance as the world’s fastest-growing economy. In this scenario, the government is pushing hard to boost MSME growth potential to make them self-sufficient. Fortunately, its efforts haven’t gone in vain.

Factors Helping MSME Growth & Development

More and more MSMEs are entering the formal economy thanks to various government-based measures such as:

GST and demonetization

Demonetization and GST have helped MSMEs reintegrate into the formal economy, creating digital footprints and making financing more affordable and accessible.

Digitization

Mobile device and digital adoption among MSMEs has increased from 45 per cent to over 85 per cent in the past four years. Statistics show the following numbers:

  • More than 90% of MSMEs use the internet for business growth and financial transactions.
  • More than 65% use communication channels like email and apps like WhatsApp to stay connected with their clients and suppliers.
  • Digital payments make up more than 60% of small businesses.

Without a doubt, going digital in business is proving to be beneficial for MSMEs. In the wake of this massive improvement and the government’s emphasis on helping small businesses with easy financing, many non-banking financial institutions have jumped on board to help to struggle SMEs in India.

Most Indian MSMEs have resorted to alternative lending platforms to fill their cashflow gaps. Let’s explore what they are.

Also Read: What Qualifies a Startup for a Business Credit Facility? A Complete Guide

Lending A Helping Hand: Alternative Platforms Funding MSMEs

1. Fintechs

Fintechs play a massive role in helping MSMEs address the yawning credit gap. Nearly 30 per cent of MSMEs receiving proper credit for the first time in the last 5-6 years have been enabled by fintech.
In a scenario where traditional lending institutions cannot approve loan applications, fintechs have provided application creditworthiness and improved technology to financially strengthen MSMEs. Thus, fintechs growing popularity among borrowers has made it an attractive alternative to traditional banking and payment methods.

2. Partnerships

MSME financing can also benefit from leveraging the networks of large corporations and brands. Large companies and lenders are integrating infrastructure and mature ecosystems into one platform. The short-term working capital segment is one of the fastest-growing segments within alternative lenders. Moreover, supply-chain links between corporations and MSME ecosystems are crucial to digital facilitators and invoice discounters. Therefore, collaboration with banks and NBFCs allows ecosystem partnerships to combine affordable fund costs with digitization.

3. Embedded financing

Integrating financial services seamlessly with traditional non-financial services is embedded financing. Earlier, to thrive within the financial services sector, companies had to develop their own fintech departments, which cost a lot of money and time. Furthermore, it takes longer for these companies to see a return on their investment. However, embedded financing makes it possible to afford easy access to financial services. Currently, the embedded finance market values at $7 trillion, which is proof enough that it is doing a good job of helping MSMEs.

4. Financing from revenues

It involves giving startups a share of their future profits as a form of financing. Generally, most small businesses obtain financing through banks or their families by offering a jewellery or property as collateral, personal guarantees, or fixed interests. The financing model solves these problems by providing cash to corporations in exchange for royalty payments from their income. This model works well for Direct-to-Consumer brands, education-based businesses and SaaS businesses.

Takeaway 

Thanks to such funding options, SMEs and startups in India can access easy credit at affordable interest rates and flexible repayment procedures. This market-led solution ecosystem has the opportunity to foster lending and easy loan disbursal to cash-strapped MSMEs, thereby enabling them to grow without financial hindrance.

MSMEBlog provides expert solutions and guidance for financing MSMEs. For more information on MSME finance, visit MSME Blog website.

Leave a Reply

Your email address will not be published. Required fields are marked *