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SME Loan: 6 challenges SMEs face in working capital management

Working capital means cash liquidity. It is the amount of money that is readily available at any time in a company. However, it isn’t really as simple as that. In the way we work today, with supply-chain cycles and markets across the globe, sale does not always mean immediate payment. Or there are situations where the inventory is already paid for, but the market has not opened yet. In both these scenarios, money can be stuck, for several months sometimes.

Large organizations have thick cushions to handle these situations. It is the smaller businesses who operate on a month-to-month model and who, despite the smoothest cash management systems, often find themselves strapped for cash to keep the business going. How keen are lenders to give a loan to small business in India?

Let’s look at the challenges that SMEs face in working capital management:

  1. Small business size does not lower regular costs

SMEs start small. And their revenue per client is also lesser. However, the manpower and product designing costs, distribution and transport costs, as well as other associated expenses are not any lower than they are for larger organizations. This, along with the smaller loans they usually need, makes them not a very attractive target for most financial institutions.

SMEs have no option but to turn to non-traditional lenders to fulfill their cash flow requirements.

  1. First time entrepreneurs

If you are a first time entrepreneur, the lack of experience and the need to manage all functions, including cash management, of the business by yourself is a challenge. It is easy to get lost in payment cycles or to overshoot the budget without meaning to. But, salaries must be paid on time and inventory must still be bought.

Perhaps you have a better grip on your finances than we imply, but you still need money to grow. For all the reasons outlined above, it is a challenge finding the best SME loan in the market.

  1. Lack of financial records

An institute looking to give a loan to small business in India needs to be able to study its financial track record. Lack of a book of accounts, non-availability of bills, no credit history, and no accounting system makes SMEs a not-so-attractive proposition for many financial institutions.

  1. High levels of perceived risk

Many SMEs suffer from what is known as ‘Credit Rationing’. Traditional financial institutions are not willing to risk lending money to a business that does not meet the typical criteria. Many conventional lenders ask for collateral which, despite a proven performance, an SME cannot produce, and the SME loan amount that lenders are willing to offer is much smaller. It is a Catch-22 situation where a business needs to show growth to be able to fund its growth.

  1. Weak and inadequate marketing

Smaller companies end up working in smaller markets and this affects their growth, which in turn affects their ability to procure a loan. The lack of funds results in slow growth and inefficient product/ company branding. Like we mentioned above, it can create quite the Catch-22 situation.

  1. Lack of branding

Not being a big name (yet) can be a disadvantage. Unlike bigger players whose brands can easily command better fund rates, SMEs have to accept funds at the rate that the market is willing to offer them.

The SME sector is still growing and once financial organizations understand the potential of smaller businesses, the opposition will reduce and SMEs can contribute to the economy.

About Alice Williams

Alice Williams has been working with writing challenged clients for over five years. She provides Business profile writing and small and large business press editing services Her educational background in science and journalism has given her a broad base from which to approach many topics. She especially enjoys writing business trends and upcoming technologies used in businesses.

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