The Biggest Challenges Faced by MSMEs

Entrepreneurship is often romanticised but owning and running a business is never easy, as owner-managed businesses face many financial, operational and technological challenges. The reality of stepping into entrepreneurship and starting a small business comes with its own share of challenges and struggles.

In this blog, we will run through some of the biggest challenges facing MSMEs in 2024, along with measures taken by the Government for resolving or mitigating some of them.

Micro, Small, and Medium Enterprises (MSMEs) in India face a number of challenges, including:

• Delayed payments: The issue of delayed payments is huge for MSMEs in India. It disrupts cash flow as MSMEs may have trouble paying employees, meeting operational expenses, and investing in growth. It limits growth potential, increases borrowing costs, damages relationships, reduces competitiveness and  job creation.
• Access to finance: Only 16% of SMEs have timely access to finance, forcing small and medium-sized businesses to rely on their own resources. Many small businesses struggle to get funding from banks due to high credit requirements, lengthy application processes, and restrictive lending policies. As a result, MSMEs often have limited access to finance and risk capital.
• Cash flow:  According to Business Insider, 82% of small companies fail due to cash flow problems. Cash flow issues are a major concern for small businesses, with many often lacking the cash reserves to cover their liabilities.
• Technology adoption: MSMEs are slow to adopt new technologies. Majority of MSMEs use outdated technology that prevents them from keeping up with times. Adoption of new technology and training employees is difficult and expensive, especially in manufacturing where both physical equipment and software are involved. Lack of access to IT education contributes to the technological gap. Another significant factor is a lack of awareness, which reduces willingness to invest in advanced technology solutions.
• Skill Development: MSMEs fail to upskill their workforce, causing them to suffer unknowingly.
• Infrastructure bottlenecks: MSME clusters, particularly the micro enterprises, are inadequately equipped with necessary support systems which not only impede their day-to-day business operations but also their future growth prospects.
• Lack of Formalisation: Almost 86% of the country’s manufacturing MSMEs are unregistered. Only about 1.1 crore of the 6.3 crore MSMEs are registered with the Goods and Services Tax (GST) regime, and the number of income tax filers is even lower. As a result of limited availability and access to data, as well as legacy underwriting methods, the credit requirements of MSMEs have largely gone unmet.
• Market access: A majority of MSMEs cite the inability to access markets, retain customers, and effectively market their products.
• Scams: MSMEs face scams and fraud challenges due to limited resources and poor internal controls. They are vulnerable to cyberattacks, including phishing scams and ransomware attacks.  
• Poor working conditions: MSMEs face the triple challenge of low productivity, poor working conditions and high vulnerability to economic, political and environmental shocks.  

The government has taken various measures to address some of these challenges, including:

New criteria for classification of MSMEs: The new criteria for classifying Micro, Small and Medium Enterprises (MSMEs) are based on both investment and turnover:

1. Micro: Investment of less than Rs. 1 crore and turnover of less than Rs. 5 crore
2. Small: Investment of less than Rs. 10 crore and turnover of up to Rs. 50 crore
3. Medium: Investment of less than Rs. 50 crore and turnover of up to Rs. 250 crore

No global tenders for procurement up to Rs 200 crore: To make industries in India self-reliant, the Centre initiated a ban on global tenders for government procurement up to ₹200 crore to encourage business for MSMEs so that they could compete and supply for government tenders.

Read in detail more about MSME New Classification

Udyam: Udyam registration helps MSMEs in the following ways:

• Access to government benefits: Udyam registration ensures that MSMEs are properly recognized and can access various government schemes and benefits.
• Cheaper loans: Udyam-registered enterprises can get loans with lower interest rates and without collateral.
• Tax benefits: Udyam-registered enterprises can access extended tax benefits and various tax rebates.
• Simplified licensing: Udyam registration simplifies the licensing process for MSMEs.
• Discounts: Udyam-registered enterprises can get discounts on trademark and patent registration fees, electricity bills, and government security deposits.
• Protection against delayed payments: Udyam registration provides a platform for seeking redressal against delayed payments.
• Free ISO certification: Udyam-registered enterprises are eligible for free ISO certification.
• Tariff and capital subsidies: Registered MSMEs are eligible for tariff subsidies as well as tax and capital subsidies.
• Expedited dispute resolution: Udyam enterprises benefit from faster resolution of disputes.
• Protection against delayed payments: Udyam registration provides a platform for seeking redressal against delayed payments.
• Free ISO certification: Udyam-registered enterprises are eligible for free ISO certification.
• Tariff and capital subsidies: Registered MSMEs are eligible for tariff subsidies as well as tax and capital subsidies.
• Expedited dispute resolution: Udyam enterprises benefit from faster resolution of disputes.
• Udyam Assist Platform: The Udyam Assist Platform (UAP) is a platform that helps informal micro enterprises (IMEs) to register online and obtain Udyam Registration Number (URN) and Udyam Assist Certificate (UAC). The UAP brings IMEs under the formal ambit and enables them to avail benefits under priority sector lending.

Inclusion of retail and wholesale traders as MSMEs. This inclusion makes retail and wholesale traders eligible for priority sector lending from banks and financial institutions. This means they can qualify for loan schemes.

Non-tax benefits extended for three years in case of an upward change in status of MSMEs: The extension applies to MSMEs that experience an upward change in investment, turnover, or both, and are subsequently reclassified. The extension allows MSMEs to continue to receive non-tax benefits from the category they were in before the reclassification.

Launch of MSME Champions portal: MSME-Champions is a technology-driven centralised control room, grievance management, and information platform. The portal’s goal is to give MSMEs a one-stop shop, assist small businesses in expanding, and settle their complaints while also helping them with other aspects of the company.

• Delayed payments: To address the issue of delayed payments, the government has taken several steps, including:
• Requiring companies to disclose payment information through the MSME1 form
• Establishing a 45-day payment rule, which requires companies to pay MSMEs within 45 days of the invoice date
• Creating the Samadhaan Portal, which allows MSMEs to file grievances and monitor outstanding dues.

The Government has taken various steps to support MSMEs financially, including:

• Prime Minister’s Employment Generation Programme: The scheme, implemented by the KVIC, aims to generate employment opportunities in rural and urban areas by setting up new self-employment ventures/projects/micro enterprises. The programme also aims to provide continuous sustainable employment to prospective artisans and unemployed youth and increase the wage-earning capacity of artisans and contribute to the growth of rural and urban employment. Read About: Employees Provident Fund.
• Credit Linked Capital Subsidy Scheme: Its objective is to facilitate technology upgrade among MSEs (Micro and Small) by providing capital subsidy of 15% (on institutional finance of up-to Rs 1 crore availed by them) for induction of well-established and improved technology in the specified 51 sub-sectors/products.
• Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE): It provides collateral-free credit to the micro and small enterprise sector.
• Special Credit Linked Capital Subsidy Scheme (SCLCSS): This scheme will help enterprises in the services sector meet various technology requirements. It also has a provision to grant 25% capital subsidy for procurement of plant & machinery and service equipments through institutional credit to MSMEs owned by SC/ST entrepreneurs without any sector specific restrictions on technology upgradation.
• Raising and Accelerating MSME Performance (RAMP) scheme: The RAMP scheme is a partnership between the Government of India and the World Bank. It was launched in 2022, and will be implemented over the five-year period from 2022-23 to 2026-27.

The RAMP scheme helps in many ways, including:

• Improving access to credit and markets: The RAMP scheme aims to improve access to credit and markets for Micro, Small, and Medium Enterprises (MSMEs).
• Encouraging innovation: The RAMP scheme promotes innovation, digitization, and technology upgradation to enhance the performance of MSMEs.
• Promoting greening initiatives: The RAMP scheme encourages greening initiatives to help MSMEs.
• Improving practices and processes: The RAMP scheme aims to improve practices and processes for MSMEs.
• Reducing payment delays: The RAMP scheme has measures to reduce payment delays and ensure that payments are made on time.
• Providing financial aid: The RAMP scheme provides financial aid to MSMEs that were affected by COVID-19.
• Enhancing Centre-state partnerships: The RAMP scheme aims to enhance Centre-state partnerships by providing grants to states and union territories (UTs).
• Preparing Strategic Investment Plans (SIPs): The RAMP scheme provides grants to states and UTs to prepare SIPs, which are roadmaps for developing the MSME sector in the state.
• Mudra Loan Scheme: It was launched in April, 2015 for providing loans up to INR 10 lakh to the non-corporate, non-farm small/micro enterprises. It encompasses 3 financing loans: Tarun (loans up to INR 10 Lakhs), Kishore (loan up to INR 5 Lakhs), Shishu (loan up to INR 50,000).

Establishing Technology Centres (TCs) and Extension Centres (ECs) to provide technology support, skilling, incubation, and consultancy.

Also Read MSME Articles:

1. MSME Classification
2. msme samadhaan portal
3. mudra loan business loan
4. ZED Certificate scheme
5. Working Capital Loan

How can the OneNDF team help?

At OneNDF, our business team helps MSMEs tackle various challenges. Our team will continually seek opportunities to make a real difference to the health and wealth of MSMEs. Listed below are some tips for small businesses to improve their financial situation.

• Develop a data-driven strategy to improve cash flow
• Cut costs and improve efficiencies
• Increase revenue by raising prices, expanding markets, or diversifying products or services
• Seek professional advice from an accountant or business consultant

You can learn more about our team’s work for growing businesses by booking a consultation with our team.