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The Indian government is determined to rev up the SME sector to achieve inclusive growth and self-reliance, as it contributes roughly 30 percent of India’s GDP, employs around 110 million people, accounts for nearly 40 percent of total exports, and more than half of them are based in rural India.

According to the CMIE Prowess database, Indian SMEs rely on unsecured loans for capital expenditure and accept only a few long-term loans. This is supported by the findings of a recent study, which found that nine out of ten SMEs rely on informal sources for operating capital and term loans (primarily unsecured loans).

Many SMEs were unable to take secured loans with lower interest rates due to a lack of appropriate asset cover (collateral), forcing them to rely on unsecured loans with higher interest rates. This has a negative impact on their profitability and economic viability, said Sandip Chhettri, CEO, Tradeindia.

According to an International Finance Corporation’s assessment, SMEs account for only 6-7 percent of lending and have a credit gap of about US$1.1 trillion. “The disparity can be attributed to structural issues such as reliance on previous credit history and lack of understanding of digital lending solutions. This big part of the credit gap will now be resolved through structural, market-led solutions,” Sandip said.

Following are some of the best SME financing strategies which will be very effective to grow the small-scale businesses to their full potential:

Lending by fintech companies

Many credit applications were previously rejected, including both business and consumer loan applications. The lack of credit history or bad credit history, a lack of documents, and other factors were some of the reasons for rejection. Fintech stepped in with new ways to assess such cases again. Better technology and application creditworthiness drove the cases from the red to the green zone. Hence, fintech is quickly gaining traction among borrowers as a more accessible alternative to financial institutions’ traditional payment and banking systems.

Collaborative financial ecosystem

Leveraging the anchor ecosystem of large enterprises/brands is another interesting method for SME finance. Many companies are bringing the infrastructure and matured eco-system of large corporations, vendors and lenders into one single platform. These platforms typically have numerous integrations (ERP/Accounting/GST) and provide deeper access to data that is typically unavailable to banks in real-time or at all.

Having a rich source of both structured and unstructured data brings new opportunities and avenues to explore for SMEs. The government’s drive for SMEs to digitise, as well as the requirement for compliance, is assisting the cause and adoption of such solutions.

Embedded banking

The seamless integration of financial services into a traditionally non-financial service is known as embedded finance, sometimes known as embedded banking. In the past, if a company wanted to operate in the financial services world, it had to do so through its own fintech division. This required enormous investment took years to build and took even longer to turn a profit. Embedded Finance Infrastructure lowers the barrier by 10x for digital platforms to offer financial services to their clients easily. Traditional lenders’ old systems are upgraded by EF start-up’s plug-and-play connections, allowing them to market their products in new age ecosystems. The market for embedded finance might be worth US$7 trillion.

Revenue-based financing

This model allows Indian start-ups to raise funds by offering a portion of their future profits. Small businesses’ traditional financing choices have been to take out a loan from a bank or family and friends in exchange for a fixed interest rate, collateral, or a personal guarantee. These problems are solved by revenue-based financing, which provides cash to a corporation in exchange for a royalty on its revenues while taking no equity in the company. Great alternative for D2C brands, SaaS or Education businesses.

All these market-led solutions have the potential to create a robust environment for SME lending. These will make disbursing working capital loans easier for underrepresented SMEs, allowing them to focus on what matters most – growing their business.


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