Common Setbacks Faced by Micro, Small and Medium Enterprises to Fund their Operations

aladiex (37)in #msmes • 4 years ago

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For the global markets, the micro, small, and medium enterprises (MSMEs) are the revenue drivers and a source of income for many startups in different countries over the past decades. This sector employs millions of people from low-income areas. Also, it contributes to boosting global exports and GDP worldwide. At the same, this promotes the grassroots levels’ entrepreneurial spirit while bringing limitless opportunities to the general populace.

Factors preventing continued growth

Apart from the advantages, several funding challenges prevent MSMEs from attaining their full potential. In India, for instance, there is a huge $240 billion credit gap in the industry while the formal financial system consists of 16% of the MSMEs. This setback hits most thriving entrepreneurs doing their best efforts to build working capital and pay off their existing debts.

Despite these ongoing issues, new policies are being created with many startups being optimistic to overcome the challenges. To remedy these, what is required is an in-depth understanding to resolve the issues that are putting the toll on the industry. This involves long-term strategies to minimize the credit gap and enhance financial literacy. Below are the basic financing challenges experienced by MSMEs worldwide.

Poor financial technical background. The diversity of MSMEs contributes to the economic strength of any country. Oftentimes, this industry consists of entrepreneurs from poverty-stricken areas and education-deprived places willing to open a small business venture.

Oftentimes, MSMEs are being managed by business owners who lack the necessary financial literacy and expertise to make sound business decisions. These inexperienced entrepreneurs make illogical financial decisions, causing imbalanced working capital. At times, they might get low credit scores, high-interest rates, and unable to leverage digital systems or optional funding networks. To overcome these issues, they need to take a grassroots-level financial literacy initiative that educates entrepreneurs to enhance sourcing, investing, and expanding their financing activities.

Low trust rating by conventional banks. Most banks and traditional financial institutions are usually hesitant in providing MSMEs with the funding support that they need. Some consider MSMEs are less attractive clients seeking meager loan disbursal amounts. Also, they are quite cynical that all MSMEs can repay them on time. This is the reason for using stricter regulations on small-time entrepreneurs.

At the same time, the returns taken from MSMEs are commonly unproportionate to the expensive transaction costs, which is a deterrent factor. MSMEs are classified as high-risk sectors among banks with their low or no credit rating. This makes banks very skeptical about MSME’s capacity to repay their loans and potential lack of working capital.

Limited borrowers’ options. As MSMEs have preference over traditional banks and loan borrowing, they simply carry the burden of opting for outdated processes and prolonged risk assessment approaches. These channels add a burden for long assessment and loan release among borrowers, disabling MSMEs the opportunity to capitalize on real-time opportunities in front of them.

Most financial lending companies require high credit scores and security collaterals. Most small-time borrowers cannot provide them. Without enough understanding of the digital lending channels, MSMEs need to spend their resources to address complex eligibility requirements and complete long paper trails. These further prolong the financing and liquidity prerequisites.

No liquidity for increasing business operations. Many MSMEs regularly operate within the limitations of high inventory costs and no guarantees of minimum order. This brings them to divert all available finances towards daily operations, causing them to be cash strapped. Thus, they seek the simplest and fastest way to get funding, neglecting to set aside resources for long-term investments when expanding their enterprise. Since MSMEs are always on the lookout for band-aid solutions to continue their operations, they are not given the chance to attain economies of scale. They are commonly left short-changed or oftentimes, they lack the required funding. This inability to get the necessary liquidity can be remedied by upgrading their financial literacy, along with schemes that engage their business to have high-return investments.

Lack of advanced funding regulations. MSMEs are faced with long-standing regulatory practices that have been existing for years. Business licenses, certifications, insurances, and tax assessments make processes more complicated for this sector. Although government schemes and the launch of the FinTech industry, most regulations must be followed, specifically in rural areas.

Without access to updated technologies and lack of access to skilled labor force prevent MSMEs from getting immediate source financing. Confronted by the inefficiencies and inequalities in the current system, regulation reforms will never be useful to the target SMEs.

The contribution of MSMEs in any country’s economy has always been recognized. The sector contributes to a bigger chunk of the GDP worldwide. However, the long-standing setback about inclusive and sustainable growth has been a barrier. The massive credit funding gap needs special attention so entrepreneurs from the hinterland can be mobilized and reduce increasing debts, high-interest rates, and debtors. The country’s financing system needs to be restructured to fill in and resolve the credit gap.

How AladiEx Can Raise Funding for your Business

AladiEx is a platform that helps enterprises increase their capital for their global projects in a low-cost, minimal barrier manner and assists investors worldwide. It uses user-friendly trading tools to easily manage their assets and enterprises. AladiEx seeks to assist a million MSMEs with the funding needs in the next five years. For more details about how AladiEx works, you can visit our website at https://aladiex.io/ and https://aladiex.com/