Challenges Faced by Indian MSMEs in Getting Business Loans

India’s Micro, Small, and Medium Enterprises (MSMEs) are the backbone of the economy. They contribute nearly 30% to India’s GDP, 45% of manufacturing output, and employ over 110 million people. Despite their importance, getting a business loan remains one of the biggest hurdles for many MSMEs in India.

Whether you’re a small manufacturer, trader, or service provider, securing timely and adequate credit can be the difference between scaling up or shutting down. In this blog post, we’ll break down the key challenges Indian MSMEs face while applying for a business loan, and explore how these challenges can be tackled for better financial inclusion.

1. Lack of Formal Documentation

One of the most common barriers to getting a business loan is incomplete or improper documentation. Many small businesses in India operate informally and do not maintain structured records like audited financial statements, tax filings, or proper accounting books.

Why it matters:

Banks and NBFCs rely heavily on documents to evaluate a borrower’s creditworthiness. Without formal records, it’s difficult for lenders to assess the risk.

What MSMEs can do:

Start maintaining proper balance sheets, profit & loss statements, and GST filings.
Register the business under UDYAM or MSME and ensure compliance with tax laws.
Use digital accounting tools to maintain transaction history.

2. Poor Credit History or Low Credit Scores

Credit scores play a crucial role in getting a business loan. However, many small business owners are unaware of how credit scores work or how their business credit profile affects their loan eligibility.

Key issues:

No prior credit history for the business
Defaults on previous loans
Mixing personal and business finances

Solution:

Check your credit report regularly (CIBIL, Experian, CRIF).
Maintain timely repayments on any existing loans or credit cards.
Avoid using personal loans for business purposes to keep credit lines clear.

3. Collateral Requirements

Traditional lenders often ask for collateral such as property, machinery, or fixed assets to approve a business loan. Unfortunately, many small enterprises—especially first-generation entrepreneurs—do not own enough assets to pledge.

This leads to:

Loan application rejections
Very small loan amounts sanctioned
High interest rates for unsecured business loans

Alternative:

Explore collateral-free schemes like CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises).
Approach fintech lenders or NBFCs that offer loans based on cash flow or sales data instead of physical collateral.

4. High Interest Rates

Even when MSMEs manage to get a business loan, the interest rates can be discouraging—especially for those considered high-risk borrowers. In many cases, the cost of borrowing outweighs the business returns, limiting growth.

Why interest rates are high:

Perceived risk due to informal operations
Lack of stable revenue history
Absence of strong financial projections

Tips to reduce interest rates:

Improve business credit score
Apply under government-linked schemes like MUDRA, Stand-Up India, or PMEGP
Compare offers from different banks and NBFCs

5. Complex Loan Application Process

Filling out forms, uploading documents, waiting for approvals—it’s a lengthy and complicated process. Many MSMEs, especially in semi-urban or rural areas, are unfamiliar with how to navigate formal banking channels.

Common pain points:

Tedious paperwork
Multiple branch visits
Delayed responses from banks
Technical language in forms and documents

How to simplify:

Work with financial advisors or consultants
Choose digital lenders with simpler online processes
Use government portals like psbloansin59minutes.com for quick eligibility checks

6. Lack of Awareness About Loan Schemes

The Indian government and banks offer a variety of schemes tailored for MSMEs. But awareness about these schemes is still low in many parts of the country.

Examples of useful schemes:

MUDRA Loans (for micro enterprises)
Stand-Up India (for SC/ST and women entrepreneurs)
Credit Guarantee Scheme (collateral-free loans)
Emergency Credit Line Guarantee Scheme (ECLGS) (launched during COVID-19)

What MSMEs can do:

Attend awareness drives and financial literacy camps
Follow official websites of SIDBI, RBI, and Ministry of MSME
Partner with local business associations or chambers of commerce

7. Limited Financial Literacy

Many MSME owners lack formal education in financial management. They may not fully understand loan terms such as EMI, tenure, interest rate types (fixed vs floating), or how a business loan impacts cash flow.

Results in:

Choosing the wrong loan product
Difficulty in repayment planning
Over-borrowing or under-borrowing

Simple actions:

Take online courses or workshops on financial planning
Consult with accountants or finance professionals before applying
Use business loan calculators available on bank websites

8. Gender Disparities in Access to Credit

Women-led MSMEs often face greater difficulties in accessing a business loan. Despite various women-oriented schemes, cultural and systemic barriers still limit their opportunities.

Reasons include:

Lack of property ownership to offer as collateral
Stereotypes around women’s ability to run businesses
Lower financial literacy among women entrepreneurs in rural areas

Solution:

Government-backed initiatives like Stand-Up India should be promoted more actively
Banks must simplify processes and reduce biases in evaluating women-led enterprises
NGOs and self-help groups can play a key role in improving access

9. Regional and Sectoral Bias

Lenders often show a preference for MSMEs in metro cities or certain “safe” sectors like manufacturing. Entrepreneurs in remote areas or unconventional sectors like handicrafts, agriculture tech, or rural services may find it harder to get a business loan.