The MSME sector has emerged as a highly dynamic and vibrant part of the Indian economy over the last five decades. MSMEs account for 30% of India’s GDP (6.11% from manufacturing while 24.63% from service activities). MSMEs are an important ancillary sector to large industries, contributing enormously to the nation’s socio-economic development. 
 
The sector also employs around 11 crore workers, a number that is growing everyday. MSMEs are not only the economic backbone for India but also the lifeblood of nations’ skilled and semi-skilled workforce.  

But despite the sector flourishing economically, Indian MSMEs still face various challenges. 

4 challenges MSMEs face despite the growth surge 

The last 2-3 years have been devastating for MSMEs due to COVID induced lockdowns. For such businesses, there’s a dire need to address ongoing challenges. Let’s take a look at some of them. 

1. Financial gap (low working capital) 

MSMEs are going through huge working capital pressures, largely because of rising production costs and lack of a similar increase in credit availability, according to India Ratings & Research (Ind-Ra).  
 
Additionally, COVID-19 safety protocol overheads, followed by higher fixed costs and lower utilisation capacity, have added to gaps in working capital. Commodity-intensive sectors, like capital goods, cement, chemicals, metals, food and energy, are facing a huge financial gap due to the spike in commodity prices.  

These issues clearly call for seamless credit accessibility for MSMEs, given the water-thin operational margins they run on. Traditional financial institutions, with their stringent eligibility criteria, are of little to no help to such businesses; they demand collateral and proven credit history, which MSMEs mostly lack as a result of their their low operational scale. This gap in credit availability and rising cost of capital has posed a widespread challenge to industry operations across segments.  

2. Delayed payments/cash flow issues 

Since small businesses operate on minimal resource availability, cash flow generation becomes an obstacle relatively quickly and this was only exacerbated by the pandemic. There have been instances where small businesses have had payment overdues exceeding 90 days, sometimes even 6 months.  

The new MSME act, however, has issued a remedial measure to fast-track these payments so that they are settled within 45 days. Yet the sector needed immediate relief via credit sources that could provide them with a strong line of credit. 

Furthermore, a major chunk of working capital in MSMEs comes from top-tier members. So, whenever there’s a cash crunch, owners have to empty their pockets to sustain the cash flow.

3. Poor adoption of trade insurance  

One of the best ways to combat delayed payments is to purchase trade credit insurance. It enables businesses to safely sell more to existing customers and to expand to new ones without worrying about non-payment problems.  

Yet, the adoption of trade credit insurance has been weak, despite the approval and simplification of procedures by the Insurance Regulatory & Development Authority of India (IRDAI). The poor uptake is due to MSMEs’ lack of awareness and the lengthy documentation process.   

However, insurance firms are finding it easy to raise awareness through case studies, including missed payments during the COVID-19 outbreak.

4. Selecting the right tools, vendors and talent pool  

Time and again, MSMEs have demonstrated their inclination towards digitalization and their preference for digital methods of payment, be it out of necessity. But their lack of technological know-how has led to several bottlenecks in establishing processes, vendor management, talent acquisition, and more.  

But there’s no one-size-fits-all approach to digitalization. You can’t succeed if you don’t have a risk/reward system put in place beforehand. And despite the government’s efforts, regulatory flaws still make it difficult for MSMEs to opt for insurance and permits for digital solutions on time.  

Despite these challenges, success is not elusive for a business if it has a structured, growth-oriented model in place, especially one that acts as a reliable means to an end for active participants (buyers, sellers, owners, investors, etc.)

Platform business model – an economic value-add for MSMEs 

Do you know what the world’s top 6 companies (Amazon, Apple, Alibaba, Microsoft, Alphabet, Facebook) and 70% of unicorn startups (Uber, Airbnb, Didi, etc) have in common? All run on a platform-based business model.  

A platform typically creates a large network of users, whether it’s the driver looking to find people who need a ride (Uber), someone looking to build a social network (Facebook) or a business looking for contractors to outsource activities to (Upwork). In turn, the platform captures a part of the transaction value. In fact, a McKinsey report predicted that platforms and ecosystems will mediate 30% of all global economic activity ($60 trillion) in the next 10 years. 

Platform businesses focus on connecting tools, teams, data, and processes under one roof, enabling interactions across a huge base of users, buyers or suppliers. These interactions could be: 

• Integrating buyers and sellers for short-term transactions 
• Long-term collaborations to achieve common goals 

That does not make platforms a suite of software products, which is a common misconception among SaaS companies. It’s because of the prevalent linear or pipeline business model these companies follow.  

So, what’s the difference between a linear and a platform-based model?  

When a linear business gains a new customer, that’s only one new relationship – one buyer of products or services. When a platform adds a new user, that person signifies a potential new relationship with every other user on the platform, be it another merchant or another buyer. And as more new users join the network, the value of the platform increases for every other existing user.  

4 Benefits of the platform-based business model for MSMEs 

So, if you’re still running your business on a pipeline model, you’re missing out on a value-driven business upswing with platforms. Here are a few reasons why platforms are key in ensuring success for MSMEs: 

1. Getting online 

Businesses generally only cater to the local communities they are located in and, though they are the lifeblood of these communities, in order for small businesses to grow, the business needs to get online. However, this requires the business to a) build out a website and b) market its products and services, both of which the business owner normally doesn’t have the know-how to do. Registering as a seller on a platform is an easy way to bypass this hassle and sell online. 

2. Digitalization and tech journeys 

When a merchant is registered as a seller with a platform, it requires no extra effort from the business, beyond having an address to keep inventory and servicing the orders that they get. The sales journey, from the moment a customer clicks on the merchant’s product to the moment that payment is made, no effort is required from the merchant since they’re piggybacking off the platform’s customer robust technology. 

3. Access a wider customer base 

Once merchants and businesses are registered with a platform as a seller, they now have access to a much larget customer base than they’re accustomed to selling only to their communities. As a result, sellers get a chance to grow and scale by selling to more customers across geographies without much effort. This gives the business a chance to leverage situations that they wouldn’t have access to otherwise. 

4. Sales insights and opportunities 

Sellers get access to sales reports and other organized data that allows them to study their selling patterns so that they can manage their inventory and sourcing more efficiently than before. Additionally, sellers can take advantage of festive or sale seasons in different parts of the country, which they wouldn’t be able to by selling offline. They can leverage these festival seasons or sale seasons by securing and stocking extra inventory during such times to increase their revenues. 

But what if MSMEs don’t have the working capital for it?  

A business’s ability to succeed or even remain competitive within the market depends heavily on adequate financial support.  

While you may try other means to get the funding like utilising your company’s cash reserves, selling some property, or raising funding from venture capitalists, business loans remain the most straightforward means to give wheels to your business. And this is where Lenders or NBFCs make life easy for MSMEs.  

NBFCs or Non-Banking Finance Companies have revolutionised the financial lending landscape. By mobilising resources and offering loans at affordable rates, they have significantly diversified the Indian financial sector. They also accelerated the credit disbursals to MSMEs and mobilised the space left by banks due to rising NPA problems.  

According to India ratings, the NBFC sector is expected to clock loan growth of 7-8% in the current financial year (FY22). So, how can NBFCs stimulate the economics of MSMEs to? Let’s find out:  

How Platforms and NBFCs partnership can end financial woes for MSMEs

Because they understand their consumers and create specialised products, NBFCs have created niche business sectors for themselves. When partnering with platform businesses to provide much needed financial services to the platform’s many sellers and merchants, it creates a win-win situation for many. 

1. Last mile customer service 

NBFCs have placed a major emphasis on the unorganised and underserved sectors of the economy. This has allowed the companies to carve out a niche for themselves through regular interactions with their customers and in-depth knowledge of demands. They ensure last-mile delivery and enhanced customer experience for a platform’s sellers.

2. Quick loan disbursal 

NBFCs have shortened the disbursal time by cutting the lag between application and verification. And sometimes in case of emergencies and contingencies, they can sanction loans within a few hours. 

3. Contextual financing 

Contextual financial services covers both recent and old data, giving you an overall picture of your members and customers and where they are in the transaction cycle. The insights drawn from this data serve as the foundation for responding to any actions or requests made by sellers. 

Contextual financial services have several advantages over traditional models, including greater distribution reach, the ability to address local client needs with customised solutions, and more flexible and affordable pricing.

4. Versatility – tech stack, risk and analytics

For one, brick-and-mortar systems have been struggling to provide the tech-savvy customers a seamless online experience. NBFCs, on the other hand, with their in-built proprietary model combining tech stack, risk management and data analytics, have enhanced the loan disbursement process. 

They achieve real-time results with the help of ML and data analytics to evaluate the borrower’s credit history. And the proactive risk management module takes care of the credit risks, liquidity risks, interest rate risks, operational risks, collateral risks, etc. 

5. Competitive interest rates 

Unlike banks, NBFCs do not benchmark their interest rates as per RBI recommendations. They base their interest rates on the Prime Lending Rate (PLR). As a result, they have the freedom to offer interest rates personalised to their clientele and the industry they operate in. This opens up the possibility of offering flexi-loan choices. 

6. Flexible eligibility criteria 

NBFC have managed to capitalise on the SME borrower segment which the banks were not catering to. Their easy terms and conditions make it easy to sanction higher loan amounts against the same collateral compared to banks. This is because NBFCs factor stamp duty and registration expenses into the market evaluation of a property. 

Closing Phrase – Let Protium help you grow your business 

Given the challenges MSMEs face, we’ve discussed the major stakeholders that can drive the company’s goals while keeping profits at scale. While platforms meet the digitalization needs of MSMEs, lenders/NBFCs bridge the gaps in their working capital so they can leverage sales opportunities by always having access to seamless credit. 

If you’re a business owner and need easy, affordable credit to grow, think of Protium. Protium is one such full-stack lender that can help MSMEs with business loans at attractive interest rates without any collateral requirements.