Challenges That SMEs Face in Getting Collateral Free Business Loans

India is called one of the fastest developing economies of the world and a great share behind this growth goes to the SMEs. In India, there are around 42.50 million registered & non registered SMEs (with investments less than 50 million) from whom the country is getting around ]24.63% of Service sector GDP and 6.11% of the manufacturing GDP. While it is said that SMEs are driving the nation and giving employment to thousands of people, but the biggest challenge they all face in running operations is of finances.

From a long time, SMEs of India are hit by poor access to funds/ business loans and the current COVID-19 pandemic has worsened the market situations. Most of the small and medium enterprises like a small restaurants, grocery stores, mobile recharge shop, garments tailor, etc. need funds for sourcing stocks, paying wages, buying raw material and meeting several other working capital requirements. But they don’t get MSME & SME loans provider easily and to overcome this situation, banking sector and financial institutions needs to access firm-specific and general risks and then offer innovative financing products.

Despite the support from RBI by including SMEs under priority sector and several efforts put in by Ministry of Small and Medium Enterprises, banks and financial institutions (FIs) are still unable to bridge this gap. The reason behind the same is the credit risk which is involved in giving Quick Business Loans to SMEs. Factors that increase risks of giving financial funding to SMEs are their lack of proper accounting systems, less number of known buyers and non-availability of valid bills.

Generally, to have lesser risk of credit, banks look for collateral or traditional equity, which due to poor financial balances, SMEs cannot manage to have. Also, the transaction costs involved in providing business loans for SMES is high because of their small size and reach to lesser number of people for earning. Most of the small and medium firms due to their financial position find it too costly to list themselves in capital markets and even when they somehow manage to do so, most of the time they fail to attract investors as everyone prefers investing money on companies that are more liquid and where there is less risk involved.