How financial advisory can help MSMEs navigate capital access challenges

For long, India’s micro, small and medium enterprises (MSME) sector has acquired the dubious distinction of being ‘informal’ or ‘unorganised’. It is a staggering reality for the sector that employs over 25 crore people, accounts for more than 45% of India’s total exports, and contributes to over 30% of the gross value added to the country’s GDP.

The ‘informal’ nature pertains to not only the way an MSME operates—many continue to be unregistered or unregulated—but also how they manage their books, access funds, or seek financial advice.

This informality poses a high barrier to growth. Over 99% of MSMEs currently fall in the micro category. A large majority will fail to grow—a phenomenon experts call ‘the missing middle’.  

But now the tide is turning in favour of MSMEs.

Firstly, efforts are underway to incorporate MSMEs and improve their resilience and growth potential. The Udyam Assist Platform by the Ministry of Micro, Small and Medium Enterprises has seen success. So far, 5.93 crore MSMEs have been incorporated, bringing them into the fold of the formal economy, and setting the stage for better credit access for cash-starved MSMEs.  

Secondly, Union Budget 2025 has widened the definition of an MSME and increased the credit guarantee cover. With this, MSMEs can potentially access an additional credit of Rs 1.5 lakh crore over the next five years. The sector is expected to see improved credit flow from scheduled banks, moving it away from unscrupulous moneylenders and opaque dealings.

This is a good time for growth-minded MSMEs to secure credit faster and cheaper. However, internal and external challenges continue to exist. 

1. Lack of collateral for a loan: Businesses need to provide tangible assets to back up their loans. Asset-light business models may find it difficult to provide such collateral.
2. Lack of credit history: The company, its founders and directors must have a clean credit history to get better loan terms.
3. Inadequate financial documentation and reporting: Smaller businesses in the unorganised sector that do not maintain proper books of accounts will attract a low credit score in a bank’s internal evaluation, negatively impacting the lender’s confidence.
4. Opacity in the fee structure of intermediaries: Intermediaries, such as financial advisors, play a key role in preparing project finance reports. However, hidden, opaque and sometimes steep costs make securing funds challenging.
5. Inadequate financial literacy: Inadequate awareness about appropriate government-sponsored schemes and instruments like Alternative Investment Funds (AIF) holds companies back from seeking the right funding source.

A quick read on a similar topic...

---

Why SMEs and MSMEs need simplified, 360-degree insurance solutions

Towards transparent, cost-effective facilities 

With the right hand-holding and tailored advisory, MSMEs can overcome these challenges.

1. Focus on financial health: Strong fundamentals are vital for fundraising. Internal controls over timely repayments and the optimal usage of existing credit facilities will contribute towards a good credit score. If an MSME takes a fair and long-term view of its accounting policies, its balance sheet will reflect that and position it well before the lender. Structured and sustained advisory on financial health is critical to deliver these outcomes. 
2. Fee transparency: Upfront, transparent disclosure of advisory fees will go a long way in building trust among borrowers who rely on assistance from intermediaries in raising debt funds.
3. Virtual CFO services: The financial information of a business stems from accounting. With a strong accounting system, the borrower can make quick, informed decisions and gain the lender’s confidence. MSMEs today can be empowered by tailored loan advisory and virtual CFO services to boost financial reporting.
4. Location-agnostic service delivery: With advisory services moving from a physical-only to a physical+digital (phygital) mode, fund seekers from smaller towns and cities have access to high-quality advisory from anywhere in the country.
5. Advising on appropriate schemes: With the Indian government promoting various schemes for MSMEs, more businesses are now eligible for credit. MSMEs that have access to the right advice will see greater success in their loan applications. For instance, they may be eligible for the collateral-free scheme under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), which offers short-term working capital facilities and term loans without adequate collateral or third-party guarantees. 

The MSME sector is set for growth with tailwinds from government policies. MSMEs need to start building strong internal practices and form trusted relationships with the right advisors to take advantage of this favourable environment. They have an opportunity to use digital platforms and experts from the banking community for services not only tailored but also transparent and cost-effective.

Rajat Chopra is the Founder and CEO of BankersKlub.