MSME finance gap: New approaches to SME and entrepreneurship financing

Access to the right and appropriate credit mechanism is a must which can only be achieved through reaching out to ambitious and trustworthy financial institutions that include a large number of emerging fintech groups

In every country’s economy, micro, small and medium enterprises play a vital role in the development of the nation. These emerging markets act as the engine of growth but need to be backed with the financial structure and ecosystem. Their dependence on credit and cash flows and subsequent access to finance is a major concern as most MSMEs remain entangled in the credit gap and become unable to excel in the market which hinders them to explore their utmost potential. Undercapitalised businesses have comparatively lower sales and growth rate and succumb to fail in the highly competitive market. 

A very small number of companies get the seamless access to raise the angel funds and rest remain struggling to get in the financial cycle of lending and management. Since the industry is still not regulated, there’s also a need to identify the new financial trends that are working towards the upliftment of MSMEs and most importantly to fill their credit gap. Most banks find MSMEs and their credit history unsatisfactory to provide financial aid. In addition to the MSMEs, entrepreneurs also have to deal with similar financial problems and remain stuck in a financial cycle of getting a loan approved while knocking doors from bank to bank.

Fintech opens a new gateway to MSMEs for a seamless credit access

With the inclusion of fintech, the transformation of the financial sector has been commendable which is ultimately boosting the progress rate of MSMEs. Fintech works on a streamlined and digitized financial model that is backed with high-end technology including artificial intelligence and machine learning. With that said, fintech companies are also way ahead in comparison to traditional banking methods when it comes to providing financial aid to the MSMEs and entrepreneurs. 

Requisite source of investment 

Fintech helps MSMEs to align in the financial sector and learn about the necessary steps that are required to attain an investment. Investors are always on the lookout for companies, especially MSMEs , to lend but due to insufficient presence and data available, they become less reactive. Fintech companies through its high-end technology and prediction analytics/algorithms create a path for investors and MSMEs to align and fulfill each other’s demands, hence closing the credit gap. 

Loan underwriting 

One of the most important criteria for MSMEs is to present their loan application to the banks. An application lacking correct financial information and background lands MSMEs into the abandonment from traditional bank’s loan outreach. Fintech companies use their automatic intelligence and align data from multiple sources/partners and help MSMEs in loan underwriting that can catch both banks’  and investor’s attention resulting in the success of loan approvals/disbursements. 

Filing tax returns

Besides providing credit ratings and feeding the incumbents with methods to improve their credit score, fintech companies help MSEMs in filing tax returns. The tools assess the small business’s evaluation, sales and other financial factors and file tax returns on their behalf. This advance feature uplifts the unnecessary burden of understanding the complex tax implications such that they can invest their time well in enhancing their business competencies. 

Risk assessment and evaluation

Fintech companies have been able to make a mark on the risk assessment/ evaluation process. The businesses providing loans to MSMEs require in-depth analysis of risks involved. As a result, banks and investment companies have been employing fintech companies to create consumer’s risk profiles. Based on these risks, the lenders become able to take firm decisions on loan approvals/disbursals. The mathematical analysis and tech-advanced models provided by fintech companies work at a break-neck speed to create an accurate risk profile for the concerned customers in the shortest span of time. 

Conclusion

With the rise of digital payments and ecommerce, the usage of mobile wallets have also increased. Fintech companies at helm can progressively help create an ecosystem where loan disbursement, credit access, and financial streamlining can be done within a few clicks. And for that to successfully function, MSMEs must become technologically advanced and savvy in the near future to experience flawless operations in the market space.

The article has been written by Vineet Tyagi, Global CTO, Biz2X