As per the Department for Promotion of Industry and Internal Trade (DPIIT), there were over 127 thousand startups in the country in April 2024. These startups with their innovative products for consumers, help develop the country’s economy.
However, like any other business, startups need seed money and additional funds to sustain themselves and expand their business across a wider area. That is founders of MSMEs and startups are constantly looking for ways to fund their businesses.
While many approach venture capitalists for funding, FinTech companies have emerged as a more reliable source for financial aid. Read on to see how FinTech is helping startups and revolutionizing the business lending scene in India.
Funding Challenges Faced by MSMEs
Proving their creditworthiness is a monumental task, especially for small startups. They require a huge amount of data to back their company’s finances and credit history. Sufficient evidence showcasing the company’s growth potential is also mandatory.
Here are some other challenges most MSMEs and small startups face with accessing finances:
Gathering Collateral
Banks and other lending agencies usually require immovable property as security against the loan. It hiders the MSMEs’ borrowing capabilities.
Lack of Information
Small businesses, especially in rural areas may not be aware of the numerous government programs that provide subsidies, guarantees, or interest rate cuts for MSME loans. They usually depend on local money lenders and middlemen for financial assistance.
High Rates of Interest
Small startups and MSMEs must pay higher interest rates and loan processing costs than larger firms, owing to their weaker creditworthiness. It hampers their profitability as the borrowing cost is huge.
Hassle of Complex Documentation
Obtaining bank loans involves numerous documentation which usually include proof of identity, residence, business registration, tax returns, bank statements, and audited financial statements. Gathering and submitting all these documents prolongs the process which in turn affects the MSMEs’ business process.
How FinTechs are Making Credit Access Easier?
FinTech companies with their advanced digital capabilities and extensive reach are helping startups and MSMEs a great deal in solving their financial issues.
A recent study from Experian has revealed that FinTech companies have facilitated over Rs.28,607 Crores Business Loans as of March 2024. These loans, mostly under Rs.50,000, have primarily reached those with thin credit files and sub-prime borrowers, the majority of whom were previously excluded from the traditional financial system.
Here are some ways FinTechs are offering financial assistance to small startups and MSMEs:
Using Alternative Credit Scoring Methods
FinTechs use innovative credit-scoring algorithms that have overcome the standard approach of evaluating financial data and CIBIL scores.
These algorithms instead utilize alternative data sources like GST reports, bank account details, ITRs, social media activities, and mobile phone usage, to evaluate an applicant’s creditworthiness. Many FinTechs also use Machine Learning methods to analyze datasets that include a business’s nature and cash flow routines.
Offering Digital Platforms
FinTech companies deploy technological solutions to ease credit access for startups. They also offer various digital payment and invoicing options to help businesses simplify their transactions. Digital transactions also help businesses monitor their cashflows online and use the translation records as proof of income and loan repayment capacities.
Delivering Customized Products
The digital capabilities of FinTech companies enable them to offer customized products matching the cash needs of startups and furnish short-term loans. These financial solutions especially benefit startups looking for consistent working capital for expansion.
FinTechs also provide loan assistance with limited documentation and offer benefits like daily repayment options. These benefits help startups obtain and repay loans easily and expand their business.
Flexible Repayment Options
FinTech providers offer digital payment solutions for startups to simplify their transactions in a contactless way. Some FinTech companies have also partnered with traditional payment service providers (PSPs) which has contributed to expanding startups’ contactless payment alternatives.
To sum up, FinTech companies, using their innovative solutions and technologies are simplifying the loan process for startups. They are helping emerging businesses access funds quickly and expand their operations more efficiently, in turn, aiding the economy of the country.
