Myths about SME Finance

Small and medium enterprises (SMEs) play an important part in the growth of the economy. The lack of financing available to these businesses is an important reason why the SME sector does not see significant growth. A large part of the industry output in India is generated through SMEs and employ millions of people. Unfortunately, SMEs are unable to grow because the environment is not conducive for their development. However, the financial institutions understand the potential of these enterprises and provide the SME sector the opportunity to grow through loans.


Overview of SME loans

An SME loan is a financial facility offered to micro, small, and medium ventures. Financial institutions offer structured financing facilities to fund the growth of these businesses. Various kinds of loans, such as project finance, secured business loans, corporate loans, working capital finance, and others are offered to the SME sector.


Here are four myths about SME finance:

1. Additional funds are needed to fund the SME funding gap

Despite the increase in the small business loans offered by institutions, there is a huge gap between the demand and supply of such financing facilities. Currently, only 40% to 70% of the SME financing demand is being met. Several people believe the gap exists due to non-availability of funds with the institutions.


The institutions have sufficient liquidity to meet the demand. However, the accessibility of these funds for the SME sector is tough. Institutions also find it challenging to fund SMEs because the sector is scattered and comprises heterogeneous groups of businesses spread across the small towns and villages around the country.


2. Commercial banks know all about SME funding

The SME sector is unregulated and scattered with unique needs and requirements. Inadequate links to the market and poor infrastructure have constrained the growth of these enterprises. Access to timely and appropriate finance further increases their challenges.


Commercial banks have started offering SME loans in India. However, many of these institutions fail to comprehend the unique needs of the sector, which limits the financial assistance being offered to the SMEs. The institutions would need to put in additional efforts and develop structured financial options to cater to the needs of the SME sector.


3. Funding SMEs irrespective of the methods is necessary

There is no argument about the importance of SMEs to boost the economic growth. With this objective, institutions are offering structured financial assistance to this sector. However, SME funding is risky due to lower revenues and lack of immovable security available with the business owners.


Financial institutions need to be cautious while funding SMEs. The higher risks associated with these ventures may result in more defaults, which could increase the non-performing assets and affect their overall profitability. Institutions must evaluate every business before providing finance.


4. Banks do not prefer funding SMEs

Another myth about SME funding is that it is not preferred by a majority of bankers. The primary reason for this non-preference is the lack of maintaining proper books of accounts. The other reason being that SME owners often have limited infusion of their personal funds in the business.


Banks perceive SME financing as a long-term relationship and are increasingly structuring loans to provide more funds to these enterprises. The institutions are making it easier and quicker for business owners to have access to these structured loans.


The SME sector is important for the economic growth of the country. With millions of enterprises employing a huge percentage of the population, making finance available to these SMEs is vital for India’s growth. 


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