Understanding MSME Challenges: Credit and Cash Flow Management Woes

Article By Mr. Nitin Sharma, Chief Product Officer and MD - SME Business, Credable

Touted as the engine of growth for the economy, the micro, small and medium enterprises (MSMEs) in India are undoubtedly a force to reckon with.

This 63-Million-units strong sector has been the sole contributor of 111 Million jobs in the country. That’s not all, MSMEs accounted for nearly 29% of India’s GDP in 2020-21.

That being said, the MSME sector is plagued by financial constraints. Owing to poor cash flow management and lack of timely access to credit, MSMEs at present, operate in adverse business conditions.

With poor cash analytics, MSMEs fail to understand where their cash is stuck, what is their aggregated bank balance, and when exactly they would need credit.

Due to the low adoption of technology in the MSME sector, these businesses struggle with a manual cumbersome process and end up missing out on the advantages of having a predictive cash flow system in place.

The COVID-19 setback: Implications of the pandemic on the MSME sector

Reeling from the onslaught of the pandemic and the recent liquidity crunch, it’s crucial for businesses to overhaul their cash forecasting process and become cash flow positive to tide over the current economic slump. 

Poor cash flow management and the lack of data-backed business plans are also some of the major reasons that have led to the current cash crunch in the sector. When businesses lack a comprehensive view of their financial standing, they end up spending more than what they are earning. From over investment, delayed payments, overstocking to high overhead expenses, poor financial planning could leave MSMEs strapped for cash.

The MSME sector is now up against never-before-seen financially distressing times. As per reports, over 73% of SMEs failed to make a profit in FY 21.

Assessing the crisis: Problems looming over the MSME sector

Some of the major challenges faced by the MSME sector in India are: 

• Lack of unified systems: Managing working capital for business is not an easy feat, especially in the absence of an integrated view of financial information.

MSMEs today, manage their finances across multiple independent systems. In the absence of an integrated platform, MSMEs are managing their banking and accounting in silos and have a poor understanding of the overall financial health of their business. 

1. Absence of structured information: As MSMEs function outside of a formal network — they find it hard to maintain accounts or observe regulatory norms, especially when they are juggling multiple business priorities day in and out. When it comes to credit appraisal, the lack of ready financial health history of businesses can hinder the credit rating process.
2. Manual reconciliation problems: Manual reconciliation has multiple pitfalls, the greatest being the time and effort that goes into reconciliation across several disconnected systems. 

Accounting teams spend hours together cross-checking Accounts Payables invoices with their bank statements to ensure that they match and the data that they have is accurate. This also ends up being quite a tedious process. 

For instance, comparing transactions may involve downloading the statements from multiple bank accounts, standardizing the files in a single format, and then uploading it to the ERP system to match the records. When the number of transactions starts to increase, this manual process will not only be overwhelming but may also be prone to errors.

1. Bad loans: While there is no dearth of business loans available for MSMEs, banks shy away or delay decisions of granting access to credit, owing to bad loans that have been on the rise.

The negative impact of the pandemic on the economy has only made banks more cautious. In addition to that, SMEs who have never taken loans before have no credit history to back them up — as a result of which, banks have become hesitant to approve loans to this sector.

Though the MSMEs are up against challenging times, a slew of key reforms introduced by the government has brought in a ray of hope for the sector. An Emergency Credit Line Guarantee Scheme (ECLGS) of Rs 1.5 lakh crore along with loan guarantees of Rs 1.1 lakh crore were some of the steps taken to facilitate the flow of working capital for businesses. 

Even with all these schemes in place, close to 50.7 Million MSMEs lack access to formal finance. MSMEs are also left with poor bargaining powers considering the cash flow challenges. Nearly Rs 15-lakh-crore is what MSMEs are owed at a point in time. 

To help MSMEs reach their fullest potential, there's a pressing need for innovative, holistic solutions that ensure seamless business management and exceptional growth trends.

Need of the hour: A unified cash flow management and credit platform

 Times like these, call for a transformative approach — one that will power MSMEs to better manage cash flows, improve their access to business loans and enable them to meet their working capital requirements at scale.  

To make this possible, MSMEs must be able to: 

• Access real-time business data on a unified dashboard to make accurate cash flow projections and forecast cash shortages or surpluses in the future
• Manage banking, accounting, and credit in one place, without the need to switch between platforms
• Easily manage collections and payments on-the-go
• Access to the latest credit score information and monitor the credit score in real-time for any changes or improvements
• Get instant access to business loans and other financial services requirements

These are trying times for MSMEs and there is an urgent need to strengthen their financial resilience. Enabling MSMEs to manage their finances better will not only help them scale up but will also power them to make more informed and smarter financial decisions for their business.