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Overcome Top 5 Challenges Of MSME Loans In India


by Mahindra Finance


April 10, 2024


4 mins read

Running a micro, small, or medium enterprise (MSME) in India comes with its fair share of challenges. While these businesses contribute significantly to the country's economy, accessing timely financing for growth and expansion can be a major hurdle. In this article, we'll explore the top five challenges of MSMEs when securing small business loans and provide practical solutions to overcome them.

Challenges of MSME

1. Inadequate financial literacy

One of the biggest challenges MSME owners face is a lack of financial literacy. Many entrepreneurs possess incredible grit and determination but may struggle with understanding complex financial concepts. This can lead to imbalanced working capital ratios and low credit scores. This can impact the MSME loan eligibility of businesses. It becomes harder to qualify for small business loans.


To overcome the challenges, MSME owners should invest in improving their financial literacy. There are several ways to do this – attending financial management courses, seeking advice from financial advisors, or participating in workshops organized by industry associations or government initiatives. By enhancing their understanding of financial concepts, small business owners can make informed decisions and improve their MSME loan eligibility.

2. Lack of modern financing solutions

Outdated regulatory practices often prevent MSMEs from accessing modern financing solutions. Small businesses may be required to obtain licenses, certifications, and insurance before they secure a loan. Additionally, many entrepreneurs in rural areas may be unfamiliar with online business transactions due to a lack of trust or technology adoption.


To improve SME loan eligibility, MSMEs must embrace modern financing solutions and MSME loan schemes. Non-banking financial companies (NBFCs) and online lenders provide convenient and accessible small business loan options. By leveraging these platforms, MSMEs can overcome the barriers created by traditional regulatory practices and access financing on time.

3. Trust deficit

Banks often hesitate to extend loans to MSMEs due to their perceived higher risk profile and limited credit history. This trust deficit creates additional challenges for small businesses while securing loans. Banks may impose stricter regulations and higher interest rates on MSME loan schemes, making it harder for these businesses to grow and expand.


To build trust with lenders, MSME owners must focus on establishing a strong credit history. Regular interactions with financial institutions, timely repayments of existing loans, and maintaining a healthy credit score can improve the credibility of their business. Additionally, exploring alternative lending options such as peer-to-peer lending or FinTech platforms can provide more accessible loan opportunities for MSMEs.

4. Cumbersome disbursement

Traditional lending options often involve lengthy loan processing times and strict eligibility criteria. For MSMEs in urgent need of funds, this slow disbursement process can severely hamper their operations and growth prospects.


Many small businesses are now turning to alternative lending institutions like NBFCs that offer quick loan disbursement and relaxed eligibility criteria. These institutions understand the needs of MSMEs and provide flexible financing options that cater specifically to their requirements. By opting for these alternative lenders, MSMEs can overcome the challenges posed by cumbersome disbursement processes.

5. Collateral requirement

Traditional lenders often require collateral as security for loans, which can be a major obstacle for small businesses that lack significant assets like property or equipment.


MSME owners can explore unsecured business loan options where collateral is not required. Many FinTech lenders offer such loans based on business performance, cash flow, and creditworthiness. These alternative lending options provide greater flexibility and accessibility for MSMEs, allowing them to secure financing without pledging assets.


While there are challenges for MSMEs while securing loans, practical solutions are available to overcome them. By focusing on financial literacy, embracing modern financing solutions, building trust with lenders, opting for alternative lending institutions, and exploring unsecured loan options, MSMEs can improve their MSME loan eligibility and fuel their growth. Mahindra Finance is an institution that understands the unique needs of MSMEs in India. With their range of financial products and services tailored for small businesses, they can be a valuable partner in overcoming the challenges of securing an MSME loan.


Q: What is the eligibility criteria for an MSME loan scheme?

A: Eligibility criteria for an MSME loan scheme vary depending on the lender and the scheme. Generally, businesses must meet certain turnover requirements and have a good credit history to qualify for an MSME loan.

Q: How can I improve my credit score to increase my chances of getting an MSME loan?

A: Improving your credit score involves timely repayments of existing loans, maintaining low credit utilization ratios, and regularly checking your credit report for errors or discrepancies.

Q: Can NBFCs provide better loan terms compared to traditional banks?

A: NBFCs often offer more flexible loan terms compared to traditional banks. They have relaxed eligibility criteria and faster processing times, making them a popular choice among small business owners.

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