Indian Micro, Small, and Medium Enterprises (MSMEs) contribute a significant percent to the country’s Gross Domestic Product (GDP). In addition, these ventures play an important role in the overall exports and employ a huge percent of the Indian population.
The Government of India constantly tries offering new policies to facilitate the growth of these businesses. Unfortunately, the Small and Medium Enterprises (SMEs) continue to face many challenges. One of their biggest challenges is access to funds to grow their business.
Several private sector financial institutions provide customised funding for this sector with the objective of fueling their growth. The SMEs contribute almost 40% towards the national exports, which makes it important to develop this segment. These businesses face many challenges, such as outdated technology, lack of skilled and affordable labour, marketing constraints, and supply chain inefficiencies, which hamper their growth. However, the biggest obstacle in the growth of the SMEs is the unavailability of working capital finance.
Here are five challenges faced by Indian SMEs to avail export finance.
1. Access to timely and adequate credit facilities
Commercial banks offer different types of financial products for the SMEs. However, the procedure to avail of these funds is very complex. Generally, the lenders require the entrepreneurs to complete plenty of documentation and other formalities, which is tough because they do not have adequate knowledge and understanding. This delay and tediousness results in the SMEs being unable to avail of timely credit facilities.
2. High cost of funds
The high cost of the trade finance facilities offered by banks makes it almost impossible for these businesses to avail of structured funds. The higher costs are directly proportional to the greater risks perceived by the lending institutions. As a result, most of the SMEs still depend on the unorganised lenders to meet their working capital requirements.
3. Large collateral requirements
The actual business operations and what is shown in the financial statements are often not the same. As a result, the banks are unable to understand the entire business from the reported numbers. This, in turn requires the entrepreneurs to provide higher collateral to avail of the funding, which is often difficult for SMEs. This limits their capability of acquiring funds, which thereby restrains their growth.
4. Inability to understand unique needs
The SMEs have unique financial requirements, which are often not understood by institutional lenders. Most banks offer the same types of export credit and other funding arrangements that they provide to the bigger companies. As a result, the SMEs are unable to borrow from the institutions.
However, some lenders offer innovative products through a large distribution network to help entrepreneurs avail of funds. Moreover, the institutions are constantly trying to reduce the paperwork and disburse the loans quickly to assist the SMEs.
5. Lack of sound advice
A large number of the SMEs depend on a chartered accountant (CA) because they lack financial knowledge. Most finance-related decisions are taken by the CA and these may not always be the right ones. The primary objective of a CA is to reduce tax liabilities, which may limit the growth shown on the balance sheet. Banks, therefore, are wary of lending to businesses where the net worth has not grown in line with the growth of the company.
Every business depends on capital for growth. If an adequate amount is not available when needed, it may result in the shutdown of the business. SMEs primarily depend on international trade finance offered by lending institutions for their growth. Therefore, these institutions must strategise their SME lending business to offer customised solutions that meet their requirements.
Institutions are actively promoting and participating in the growth of this sector. However, there is an immediate need to revamp the credit assessment and debt restructuring for the SMEs. Offering advice and support during the early stages is mutually beneficial to the business as well as the lenders. Taking steps to overcome the challenges of funding SMEs and bridging the financial gap will allow growth for the companies, banks, and the economy as a whole.
All these challenges can be eased if you opt for financial assistance from a trusted institution like Kotak small and medium enterprises group, where they understand that choosing the right product is the most important and getting it customised comes second. At Kotak SME you can explore their products ranging from cash management services to IT solutions and select the best for your business.
