MSME Money Talk: Sources & Challenges in India

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The economic benefit of India is  gained through small businesses. MSMEs, also known as Micro, Small & Medium Enterprises of India employ a large number of people and contribute to an excess of 95% of the production sector. For these start-ups to thrive, they will need some sort of funding. There are various ways to get funds. However, there is still a tough roadblock in India when it comes to finances for Small-scale and medium enterprises. This tutorial will explain how there are multiple financing choices and what problems you have to face usually when starting a small business to aid small businesses in India to grow. Two important elements are crucial.                            

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MSME loans in India

MSME loans are providing a key path to getting funding in India, which is helpful for bankrolling  small businesses. Business loans are made to help businesses financially  to fulfill many needs (for instance loans can be used for buying machinery etc.) MSME loans are mostly acquired by banks, some financial institutions, and using a government grant. Different types of factors are involved in the loan such as return, interest and collateral demand. It has been modified according to my priorities, made for me and my venture. The Indian government has taken steps such as financial aid to promote the MSME and help them grow. Improve their businesses, this helps the entrepreneurs, which positively affects the country’s economy. The loans potentially pave the way for small businesses to grow and turn into successful ones. The country can improve its economy by hiring more people. MSMEs face pitfalls in borrowing  capital because their eligibility standards are rigid the mediation method is complex, and there is inadequate cognizance of  existing systems. The MSMEs have to face such obstacles  to get the right funding, necessary for their growth. Through this, they could equally help in developing the country’s economy.

MSME loans in India for Various Purposes

  1. Government Schemes

India promotes start-ups by giving out loans without any security deposits and with low interest rates. This increases small business owners through various schemes. 

  1. Digital Lending Platforms

The rise in digital platforms is facilitating MSMEs by offering application loan services through a smooth and active medium to cut down on extra paper use. 

  1. Credit Guarantee Fund

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) ensures that businesses can get credit even if they don’t have heavy security by providing  lenders with a surety on their behaviour. 

  1. Technology Adoption Incentives

Micro, Small, and  Medium Enterprises that incorporate technology will be offered with lowered interest rates and exclusive offers which is to encourage them to run their business. 

  1. Sector-Specific Initiatives

Under MSME specific loan scheme categories, textile, technology, and food processing sectors are attended in such a way that meets industry financial needs. 

  1. Delayed Payment Protection

MSMEs have a right to gain extra money from their clients in the shape of interest  to tackle this issue. 

  1. Credit Linked Capital Subsidy

There are some subsidies provided by CLCS for enhancing the machinery and equipment required by small scale enterprises to MSMEs only.

  1. Trade Receivables Discounting System

Medium, Small and Micro Enterprises can convert the invoices they owe to immediate cash as a way of improving cash flow, through TReDS platforms. 

  1. Start-up Funding Initiatives

The government has allocated funding and support services for small businesses to grow, these can be utilized by the start-ups within the MSME sector. 

  1. Credit Rating Support

Credit rating schemes will allow MSMEs to establish a credit history, which makes it more attainable for them in prospective times.

Also Read: Importance Of MSME Loan For Small Business Owners

Government schemes for MSME finance

MSME (Micro, small, and medium enterprises) products have been created by the government to help these business lines financially  to meet their needs.

  1. Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE):

  • What it does:

The given scheme will ensure that the loans are paid off to banks by the small businesses. 

  • How it helps:

In case small businesses fail to repay their loan, the government can intervene by compensating the bank for a portion of that loss. 

  1. Pradhan Mantri Mudra Yojana (PMMY):

  • What it does:

This program is for small scale businesses and aims to provide funding for entrepreneurs. 

  • How it helps:

Three types of categories are Shishu, Kishor, and Tarun on the basis of business needs and place. 

  1. Credit Link Capital Subsidy Scheme (CLCSS):

  • What it does:

To upgrade the technology from existing to a better level, the Capital subsidy is provided under the CSCL SS. 

  • How it helps:

The provision of subsidies helps  small businesses to raise their resources and productivity at a price lower than market rates. 

  1. Interest Subvention Scheme for MSMEs:

  • What it does:

To improve their businesses the sector has taken out loans and to ease this burden there is an interest frontier provided by the government. 

  • How it helps:

They get loans at a lower interest rate through which they can manage their finances efficiently. 


  • What it does:

This online portal is designed to ensure the policies for MMEs are being implemented accurately. 

  • How it helps:

Small business owners can access the details and updates on policies by the government.

  1. Technology Upgradation Fund Scheme (TUFS):

  • What it does:

TUFS supports upgrading technology in some specific fields. 

  • How it helps:

It provides funding for MSMEs that help them revamp their technologies to improve quality and stay competitive. 

The main aim of these schemes is to provide a backbone for small and medium-sized businesses financially, which allows them to improve their operations by increasing their technology interventions. This further leads to an overall increase in production and success. 

Challenges in MSME financing

  1. Limited Access to Credit:

  • Issue:

Due to restrictions set by financial institutions, the one issue that small business owners have in common is difficulty securing bank loans. 

  • Why it’s a problem:

Small businesses fail to meet their needs and become established as they wish, because they don’t have enough money. 

  1. Lack of Collateral:

  • Issue:

Before giving the loan, banks will request an amount as a guarantee that you won’t repay them. 

  • Why it’s a problem:

Since most small businesses do not possess enough valuable assets, it makes it hard for them to provide collateral  to get a loan. 

  1. High-Interest Rates:

  • Issue:

For MSMEs, it’s obvious that the higher rates of interest sometimes become a permanent liability for them. 

  • Why it’s a problem:

Small businesses are challenged to remain profitable since most of their revenues offset the interests that accrue from their loans. 

  1. Limited Awareness about Schemes:

  • Issue:

Many small businesses are not aware of government schemes that could help them financially. 

  • Why it’s a problem:

They are unable to gather enough support systems that would help them propel their growth pace. 

  1. Complex Application Processes:

  • Issue:

One of the most complicated and time-consuming processes  is applying for loans or schemes. 

  • Why it’s a problem:

For sure if the owners are lessening their income they will avoid this at all cost by not using it or delaying some work. 

  1. Risk Aversion by Lenders:

  • Issue:

Small businesses may not have the capacity to take loans from formal institutions because of high interest rates. 

  • Why it’s a problem:

Micro, small and medium scale enterprises (MSMEs) will be unable to expand their business operations into new areas (geographically) if they do not have finances. 

  1. Inadequate Financial Literacy:

  • Issue:

Few entrepreneurs who run small businesses may not be smart enough to grasp the indispensable financial notions, leading their business down a spiraling path. 

  • Why it’s a problem:

MSMEs can’t achieve their desired goals and targets when financial choices are poorly made because they don’t have enough finance handling skills.

  1. Market Volatility:

  • Issue:

Variations occurring within the market affect smaller businesses with higher intensity. 

  • Why it’s a problem:

MSMEs will not repay their liabilities, because a fluctuation in the economy could affect their incomes. 

It is important to provide a supportive environment for MSMEs, so that they can address and thrive through a large number of challenges. 

Interest rates on MSME loans

If you want to start a small business by taking a load from the bank, they charge interest on that mortgage amount. The extra amount paid for the borrowed amount is called interest. This is like a rent that we pay on borrowed money. 

  • Fixed Interest Rate:

If you lend extra dollars then 5% will be the same on all borrowed amounts from the original. Ultimately, you have to pay $105 in any case; which includes the original amount of 100 and the interest amount. 

  • Variable Interest Rate:

If you think with an example, the variable interest rate is like a price that can vary. The value of money might change up or down because things in the world will keep changing. However, today’s interest is 5%. If you have borrowed $100 at a 5% interest rate then by the end of this year, you will owe $105. 

  • Compound Interest:

This occurs when we earn interest on the existing interest. For Example, you borrow $100; with a 5% interest rate from the bank. Interest will be calculated on the amount of money you have borrowed initially and on  all previous lender interest whenever they calculate it. The amount you need to return will increase at a rapid rate. 

  • Annual Percentage Rate (APR):

The cost of borrowing represents the total amount that needs to be paid by the borrower. It calculates all the costs such as interest by taking a loan. An 8% APR indicates a total of 8% interest will be paid on the borrowed amount. 

Ensure the interest rate is at a minimum since it results in lower overall borrowing costs. Before utilizing any borrowed money, make sure to read all the terms and conditions carefully. Read the fine print to know how much interest you will be paying.

 Alternative funding sources for MSMEs 

  • Friends and Family:

Most of the time the greatest support is through family and friends. In addition to this, money could also be borrowed from friends and family members. It is important to keep the communication clear about how expectations are going to be met, and the repayments will be made. 

  • Personal Savings:

Your piggy bank! Funding your business using personal savings means you don’t need to answer anyone else. It’s like investing in you. However, you need to save a certain amount of your income for unexpected times. 

  • Crowdfunding:

If there are a large number of people who are united to invest a small amount in your business, your idea will surely make it to the top. That’s crowdfunding. Platforms like GoFundMe and Kick-starter are useful for making  certain crucial connections.

  • Angel Investors:

Angels aren’t always with wings! When people have some extra amount with them and find some businesses  beneficial for the future they become angel investors. People tend to invest their money in your business on a profit-sharing basis. 

  • Venture Capital:

It is similar to having a big brother or older sister in your business. Venture capitalists are companies that invest money in industries that have a high growth potential. They provide funds and in turn, they get some ownership or equity within the business. 

  • Government Grants and Subsidies:

The government provides financial benefits in terms of subsidies or monetary funds to promote small businesses. This acts as a financial support system from the government to uplift your business initiatives. 

  • Trade Credit:

By buying stuff now, and paying for them later, suppliers offer a degree of flexibility on when the payment could be processed. This could be a somewhat alternate way and time to get money after purchasing , before you have to clear the cost of what you bought. 

  • Microfinance Institutions:

They act as financial partners for businesses. Financiers are a great way for business owners to get small loans easily without any strict eligibility criteria. 

Obviously! Different companies require different resources to promote their work in a better way. It is important to choose an appropriate tool for the job. It is important to carefully read and comprehend the terms and conditions before getting  funding from any platform.

Impact of finance on MSME growth

If a vehicle wants to move, finance is the fuel that will drive it. It helps MSMEs in several ways:

  1. Starting and Expanding:

Have a thought about opening up your business or expanding it. Finance refers to the money needed for buying certain assets such as inventory,  and space.

  1. Hiring More People:

There is always a need for more personnel when a business starts to grow. One of the most vital areas where finance can function to sustain and grow an MSME is by helping them hire personnel, and  pay wages and salaries on time.

  1. Buying Equipment and Technology:

Another important reason to consider while opening a bakery is the cost of resources. An entrepreneur will need to invest in good quality ovens, utensils, and other equipment that are essential for operations. It provides an opportunity to enhance the company in a better way.

  1. Innovation and Improvement:

Similar to how one updates  their phone while a newer version is available in the market, businesses need to upgrade themselves too. This wide field allows businesses to be more creative and efficient, leading to  substantial competition in the market.

  1. Dealing with Challenges:

There are some times when a slow period or any other sort of unusual thing happens. It is important to have an understanding of finance as it helps in difficult times. 

  1. Repaying Debts:

When a company takes a loan from any financial institution, it must use part of its earnings to repay the funds on time. It relates to the commitments that we make with our known ones and to those when a favor is made during times of need.

  1. Advertising and Marketing:

You need financial support for the advertisement of your business. It is a way of advertising your bakery about the quality of cakes you make to increase your customer base. 

Finance is the cannon through which smaller companies can excel by moving forward and growing. In the absence of this resource, companies cannot go forward on a required path and are likely to be stalled. For a business to have a successful and sustainable journey, it is important for one to wisely manage their finances just like the driver drives carefully with enough fuel. 

Collateral-free Loans for MSMEs in India: Sources and Challenges

In India, providing loans without any guarantees is an important way to empower and improve small businesses on a large scale. These loans are created to facilitate people who want to start their businesses, but they do not pledge any collateral. Having such loans is necessary for the entrepreneurship of small business, to create jobs and empower economic growth. On one hand, it can be a reliable source of initiating a business. On the other hand however, there are challenges associated too.

Sources of Collateral-free Loans:

  1. Government Initiatives:

  • Pradhan Mantri Mudra Yojana (PMMY):

PMMY provides small enterprises with loans that are free of any kind of collateral. 

  • Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE):

This program provides an easier way for MSMEs to take loans by giving collateral trust to them instead of providing something physical in banks. 

  1. Financial Institutions:

  • Non-Banking Financial Companies (NBFCs):

Certain NBFCs are specifically established to provide MSMEs with unsecured loans. They tend to mitigate credit standards that are not traditional. 

  • Small Finance Banks:

The main purpose of these banks is to fulfill the financial needs of small level businesses and give loans without any mortgage.

  1. Online Lending Platforms:

  • Fin-tech Companies:

The lenders can provide loans to MSMEs without requiring collateral, this is because they use advanced mechanisms in assessing risks. 

  1. Industry Associations and Cooperatives:

  • MSME Associations:

Different industrial affiliations offer support to the members by providing loans with no collateral. They do so to utilize the strength of their members collectively. 

Challenges Associated with Collateral-free Loans:

  1. High Interest Rates:

It is a harsh reality that loans without any guarantee have unattractively higher amounts of interest for the borrowers because there is equal risk involved. A huge problem faced by MSMEs is their cost capital which will impact (negatively) how the capital is utilized. 

  1. Limited Loan Amounts:

The businesses cannot grow and they do not have many financial resources to back the employees or business ideas since there will be a limitation in the amount that can be borrowed due to low security. 

  1. Stringent Eligibility Criteria:

Most of the time MSMEs face issues with qualifying criteria set by financial companies for loans because they are stringent. 

  1. Creditworthiness Challenges:

Micro, small and medium enterprises are not more likely to be unable to get large amounts of loans mainly because they can’t fulfill the collateral obligations nor have a strong financial history against which they can obtain credit. 

  1. Lack of Awareness:

Financing options are difficult for the MSMEs. They don’t know how to apply for a loan and what is the process, so their access is limited. 

  1. Regulatory Challenges:

MSMEs may find it difficult to plan for their financial objectives and goals since the loans will not be collateral free – due to the changes in regulations. 

Credit Assessment for MSMEs in India: Sources and Challenges

The credit assessment is the process in which we evaluate the financial position of our customer and whether he will be able to return it or not. For any form of financial support, credit assessment is crucial. It impacts what medium and small-sized enterprises will be eligible to borrow money or not in India. Through this process we will analyze how much credit should be provided to the MSMEs, and what is their financial health, profit margins and repayment capacity.

Sources of Credit Assessment:

  1. Financial Statements:

To examine the worth of MSMEs, financiers usually delve deep into their financial statements like balance sheets and income statements. Financial reports provided by the company give us a rough idea of how much it’s earning and spending, to make it stable in the market. 

  1. Credit Reports:

There is a set history of an entity’s credit that this reporting maintains. The reports are used by the lenders to assess how much a borrower is worthy of credit and what level of risk they pose for lending. 

  1. Business Plans:

The MSME sector nevertheless demands  well deliberated business plans that reflect their line of operation, value proposition and future road map. The details provided help the finances examine how beneficial the trade will be and how it will generate enough revenue to refund the loan. 

  1. Collateral Evaluation:

There are doubts, such as collateral or mortgage, to secure loans with the lenders. In the banking sector, collateral serves as a valuable source of recovering funds in case  there is a loan default. 

  1. Industry and Market Analysis:

Lenders take into account the industry and market circumstances where an MSME functions. Any kind of market issue is most likely to affect participant assessment; whereas stimulated industry revenue makes it certain.

Challenges in Credit Assessment for MSMEs:

  • Limited Financial History:

There are limited chances for the new MSMEs to validate their cash flow; this makes it harder for lenders to examine their credit value. 

  • Informal Nature of Operations:

A large chunk of businesses operate in the unorganized sector. For a comprehensive credit evaluation, problems are caused due to the lack of financial records and formal documentation.

  • Risk of Default:

Business risks are more common in small ventures especially at the start. Before giving out loans, money lending businesses need to be sure that they can handle the possibility of not getting paid back on time. To do this will require stable resources as well as efficient methods. 

  • Complex Regulatory Environment:

For lenders, it could be difficult to navigate a complicated regulatory business environment because MSMEs have to follow a large number of rules and guidelines set by the government. 

  • Macroeconomic Factors:

The situation of credit can be affected if external factors like economic conditions and changes in interest rates happen which adds a layer of complexity to assessment. 

Credit evaluation done for MSMEs in India is comprehensive and evaluates a variety of indicators which includes both, financial and non-financial ones. To support small and medium-sized businesses within a country, an efficient financial ecosystem is pivotal. This can be achieved by overcoming hindrances in the process of credit evaluation. 

 Debt Financing

Financing through debts is when businesses whether small or medium size, gather the amount by lending from some financial institutes. Small and medium businesses in India often depend on debt financing to secure their operations and meet their expansion goals. Long term loans with an interest component are taken under this mode of financing. The loan can be repaid after a significant amount of time.

Sources of Debt Financing for MSMEs in India:

  • Bank Loans:

Large financial institutions are one of the most important sources through which micro, small and medium enterprises can raise debt. Loans can be categorized into secured loans or unsecured loans based on the financial position of the business.

  • Non-Banking Financial Institutions (NBFCs):

Non-banking financial institutions are paramount because they provide funds and other banking facilities to MSMEs. Due to more open and wider criteria in taking applications, they can satisfy the needs of a greater number of businesses. 

  • Government Schemes:

The government of India aims to help MSMEs in funding their debts through several initiatives. These plans are designed to facilitate small businesses in different ways such as by providing loans without any security, at lower interest rates. 

  • Venture Debt:

Start-ups usually use venture capital but for faster growth some MSMEs firms also go for VC by taking traditional loans. 

  • Trade Credit:

Micro, Small and Medium Enterprises (MSMEs) have the advantage of asking  for longer periods from trade creditors if they need to. This method simply acts as a way to take some short-term debts between the company (the debtor) and the investor (the creditor). 

  • Public and Private Bonds:

More established and large MSMEs are capable of selling bonds to investors. Bonds are a form of company debt that must be given back to the debt-holder after a fixed period with an extra amount defined as interest.

Challenges in Debt Financing for MSMEs in India:

  • Collateral Requirements:

To get a loan, certain lenders — such as traditional banks — will require you to promise something as collateral. Micro, Small and Medium-sized Enterprises may not be able to lend money from the bank because they do not possess enough assets. 

  • High-Interest Rates:

Borrowers who belong to high risk categories tend to have higher rates of interest on their loans. Medium and small scale enterprises will have to face problems because they won’t be getting their desired levels of profit and this will thus affect how business goes altogether. 

  • Limited Credit History:

Small businesses might not have a well developed credit history. The business will likely suffer from a lack of credit history as it is nearly impossible for lenders to gauge the reliability of the businesses they are investing in. 

  • Regulatory Compliance:

During the need for a debt acquisition, there are certain standards that MSMEs need to meet. The compliance of these rules and regulations will consume a lot of time and can be very hard for businesses. 

  • Macroeconomic Factors:

Reduced rates in the economic world can change how easy financial borrowing is and how much it will cost. The terms and conditions for securing funding become stricter during unfavorable market trends. This forces the MSMEs to struggle harder to secure funding for their businesses.

Advantages of MSME 

1)  Employment Generation

– Significant Contributor to job creation.

–  Flexibility allows for adaptability in hiring.

2)  Flexibility and Adaptability 

– Quick decision making

– Ability to tailor products

3)  Local Economic Development

– Integral part of local economics

– Contributing to economic growth

4) Innovation and Creativity

– Nimble structure fosters innovation

– Greater room for experimentation and creativity

Also Read: Benefits of MSME Registration for Small Business Owners in India 

Key Characteristics of MSME

Points Description
Size of Operations Varied sizes based on classification (Micro, Small, Medium)
Local Market Focus Concentration on serving local markets for community development
Innovation and Adaptability Agile and flexible, fostering innovation in products and business processes.
 Community Integration 


Diverse Ownership Structures


Closely integrated into local communities, playing a vital role in the regional economy.
Family-owned, partnerships, or individual entrepreneurs.
Local Employment Generation Significant contributors to local employment opportunities
Risk-Taking Ability Willingness to take calculated risks for exploration.


In India, the finance landscape is critical for MSMEs to develop and survive. The sector leverages an array of diversified financial sources ranging from traditional banking, and equity financing to trade credit mechanisms. The financial sector needs a well detailed and joint approach because it is surrounded by obstacles such as high interest rates, uncertainties within the macroeconomic environment, the need for collateral and difficulties in assessing credit names To establish an environment for the MSMEs, it is critical to tackle the challenges. This environment would help them address their financial needs efficiently. To be sure that Small and medium-sized enterprises are helping India’s financial growth, there has to be additional work done by governmental agencies as well as the private sector. This will reduce the barriers in their path to progress.

Also Read: New Normal – Technology For MSMEs | Adopting Technology For Growth


  1. What ways can MSMEs use to fund themselves in India?

For the promotion of MSMEs through financial help, various sources are available. Such as banks, NBFCs and investors etc.

  1. How can government schemes help MSMEs to obtain their financing?

The Indian government has started a scheme named Credit Guarantee Fund Trust for Micro, Small and Medium which assists in terms of money without asking for any assets as collateral. 

  1. What problems do MSMEs face when they are trying to get loans from banks?

Entrepreneurs who want to loan facilities often face too many requirements from banks such as high-value collateral and others. 

  1. Should the funding options to MSMEs be offered only by banks or are there any other formal ways?

Small and medium industries can get their money needs through peer to peer lending, invoice funding, and trade credit.

  1. What is the influence of GST on small businesses in raising capital for their operations?

MSMEs will be able to get credit from banks and other financial institutes because they now have a transparent way of showing their tax history. 

  1. How do credit agencies impact financing MSMEs?

Credit rating agencies examine how small and medium scale enterprises can  handle their credits, good marks ensure low rates. Through this they can secure significant funding from financial institutions with lower interest charges. 

  1. What problems are faced by MSMEs to manage working capital?

Small businesses often have a hard time efficiently managing their capital in an efficient way because of delayed payments, issues in handling inventory and sporadic changes in the market. 

  1. What are the ways through which MSMEs can efficiently manage and improve their financial performance?

Fin tech can help small businesses in digital transactions, maintaining account books, and creating automated financial reports; through these tools they can also improve how they operate their cash flows. 

  1. How can financial literacy help to overcome the financial issues of MSMEs?

Having good financial skills is important for small businesses since this will enable them to know the available options, and make cost-effective decisions.

  1. How can small businesses fill the skill gap concerning money matters?

MSMEs need to invest in their employees and  effectively use their financial resources. MSMEs who don’t have enough skill set to improve can also contact external consultants for this matter.

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Rutuja Khedekar Freelance Copywriter
Rutuja is a finance content writer with a post-graduate degree in M.Com., specializing in the field of finance. She possesses a comprehensive understanding of financial matters and is well-equipped to create high-quality financial content.

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