The Role of Fintechs in New-age SME and Entrepreneurship Financing

Micro, Small and Medium Enterprises (MSMEs) are as important as IT and telecom giants to India’s economy. The country is home to over six crore MSMEs, which come in varying sizes. Some have revenues exceeding ₹250 crores, while others are single-person enterprises. Regardless of their financial strength, though, every MSME is equally valuable, and they together employed 11 crore Indians in the financial year 2021.

Their importance cannot be overstated, yet access to credit remains a problem. MSMEs cannot easily tap into the credit market, which hampers their vision and growth. The government has taken steps in the right direction, but the gap is only increasing. According to the Association of Chartered Certified Accountants (ACCA) report, close to five crore MSMEs lack access to dependable credit.

According to the World Bank, the credit gap has increased exponentially in the last five years and is now worth almost $380 billion. These are alarming numbers, and most of them stem from the lack of trust traditional institutions have in MSMEs.

Due to their informal way of doing business, many MSMEs do not maintain their books and record every transaction. They also do not have assets to offer as collateral like large corporations, making it extremely difficult for banks to provide secured small enterprise loans. Sponsoring an enterprises’ credit needs without collateral can backfire for a bank and affect their balance sheets. Fortunately for MSMEs, a new approach to SME and entrepreneurship financing is gaining traction and could forever address credit problems.

Fintechs and MSMEs: A Natural Fit

Digitisation is at the heart of fintech. Unlike traditional banks that give more value to security, fintech focuses on data. Their efforts are geared towards finding the best solution for borrowers using data analytics, machine learning, and other technologies. This is extremely helpful for MSMEs and entrepreneurs who do not have the assets to secure loans but have a clean credit history.

How Can Fintech Help MSMEs Secure Funding?

Data is not the only thing that fintech has on offer. Here are some other ways fintech can help MSMEs and entrepreneurs acquire funds for their business needs.

• Learn how to secure funds

MSMEs and first-time entrepreneurs do not have the required knowledge to secure funding the right way. They cannot present their ideas constructively and convince investors to invest in them. Fintech companies can come in handy here, as they leverage their technology and data prowess to help MSMEs and entrepreneurs acquire the proper knowledge and skills to secure funding. Investors can benefit parallelly by investing in undervalued companies.

• Present a worthy loan application

Banks offer enterprise business loans after evaluating financial statements and conducting background checks. SME owners and budding entrepreneurs looking for seed funding rarely know how to strengthen their financial statements and present their accounts transparently. Their applications are usually rejected for lacking the right information. Fintechs can help them with automated intelligence tools that align data constructively. It can strengthen the bank loan application for MSMEs and help them secure funding quickly. 

• Automate filing tax returns

Growth is and should be the primary goal for firms. However, taxation is an unnecessary distraction that can eat into their time and affect productivity. Thanks to fintech firms, MSMEs can automate filing their tax returns using enterprise tools. Fintechs can file the tax returns on the MSMEs’ behalf, helping the latter focus on growth. This can also cut costs by removing the need to have dedicated resources for taxation. Outsourcing to a fintech can be a more affordable option.

• Smart risk assessment

Banks use traditional methods to assess the risk associated with a business model before approving loan applications or lending funds. However, their methods are outdated and nowhere as quick as the process used by fintech. The latter have intelligent systems in place, which use artificial intelligence (AI) and data analytics to understand borrowers’ behaviour.

It can help MSMEs quickly access small enterprise loans and meet their working capital and business needs.

Fintechs and MSMEs have a significant role to play in India’s economy in the coming years. Therefore, it is only fitting for them to collaborate and find solutions to help them grow together. Fintechs can leverage the sheer number of MSMEs in India to grow their business, while the latter can use fintechs’ experience with data to secure funds.