MSME Cash Flow Challenges And How To Tackle Them?

Msme Cash Flow Challenges


The current economic growth in the country has led to a sudden upsurge in the establishment and growth of several micros, small, and medium enterprises. Popularly known as the MSMEs, these business enterprises are responsible for driving almost 40% of India’s GDP. With the industrialization of rural areas, more than 20 million rural, semi-urban and urban MSMEs have pictured in the business market, employing millions of citizens.

MSMEs ensure a more equitable distribution of national wealth and have gradually stolen the limelight. The Government has also realized the importance of this sector and has taken significant steps for MSME growth and promotion.

Here is a table that represents the contribution of the MSMEs in the Indian economy.

MSME Category Share %
Manufacturing 31
Trade 36
Other Services 33
Total 100


The MSME sector primarily consists of the marginalized sections of society that struggle to find private equity capital support by the traditional ways of setting up and running a business. The most important concern of an MSME is that of Cash Flow Management. They face various challenges in terms of business finance, human resources, and marketing. Whether it is a business loan for a pharmacy or a medical store financing, small business enterprises face difficulties in arranging funds. Let us have a look at the various challenges faced by a typical small business enterprise.

What are the MSME Cash Flow Challenges?

Despite impetus from the government, the MSME sector still faces several challenges that impede its growth.

  • Banks reluctant to give loans – Money or finance is the lifeline of any business. The MSMEs face the biggest problem of financial crunch and lack of credit facilities from banks and financial institutions. Banks and NBFCs have stringent procedures for disbursing loan and loan products based on creditworthiness and credit history. For example, a business loan for a medical store may pose a set of complex eligibility criteria. The MSMEs have to produce various documents that are difficult to arrange in the initial stages of the start-up.
  • Inadequate Cash Flow- Most of the MSMEs come from the marginal section of the society. They are set up by people who do not have stable business backgrounds that can provide financial security and backing to the upcoming organization.
  • Credit Risk- Since most of these micro, small, and medium enterprises are new to the business scenario and have just set up the business, they do not have the necessary experience and business expertise. Due to the lack of reputation in the market, banks are hesitant to finance these organizations as they perceive credit risks and bad debts. Not all businesses get loan eligibility from the lending institutions.
  • Lack of utilization of alternate sources of finance – The MSMEs lack general awareness and knowledge about alternative sources of business and working capital finance that can supply funds to them on time. Most businesses still interact in cash and rely less on banking facilities. Some rural business enterprises do not even have a bank account.
  • Improper Cash Flow Management – Most of these organizations have limited knowledge about the management of cash flow and how to regulate it. The businesses struggle to pay immediate bills because of negative cash flows as expenses exceed profits.

Ways to overcome these challenges

  • Adoption of FinTech measures– Financial technology comes to the rescue of the struggling MSMEs. Fintech companies offer a one-stop-shop for MSMEs for their creditworthiness assessment, providing ways to track their payments and invoices and offering short term loans on a timely basis.
  • Educating about Government schemes and programs– Most of the rural and semi-urban businesses are ignorant as to the assistance provided by the government. The Pradhan Mantri Jandhan Yojna intends to provide zero balance savings accounts and mobile banking facilities to the weaker sections of the population. Until proper education is not there, businesses will stay unaware of the various schemes.
  • Merchant Cash Advance- The MCA or the Merchant Cash Advance is fast emerging as a popular alternative means of finance for the SMEs. By utilizing this method, the small businesses can avail of advance cash against their accounts receivables. It can be repaid easily by a small EMI method or with the help of their debit/credit cards. This scheme requires less dependency on the credit history of the business.
  • Supply Chain Finance- This method provides yet another way to finance the working capital needs of SMEs. Some NBFCs offer distributor finance programs that offer to finance an SME supply chain. Factoring or financing receivables of the business should also be encouraged as an alternative means of finance for the organizations. Factoring provides SMEs with timely funds and can be an authoritative source of alternative finance.
  • Utilizing Alternate means of Finance- There is also a need to encourage private equity distribution among the MSMEs. Angel Distributors and Venture Capitalists are forerunners in this category. Several large and established business firms have shown interest in the development of MSMEs. The MSMEs need to realize that funding should be a mixture of debts and equity capital. Relying on loans from banks or NBFCs alone will not solve their problem. Also, arranging finance from private equity measures s easier and prone to less stringent regulatory standards as compared to public finance or banking.


The Micro, small, and medium enterprises are the pillars of growth in the Indian economy. They are striving to provide a wide range of products and services to cater to the needs of society. They have created jobs for millions of Indians across the rural and urban areas. Despite financial struggles, this sector has seen tremendous growth potential. The problems faced by these small enterprises as we have discussed above need a timely resolution. Fintech companies are attempting to automate their operations and provide hassle-free and straightforward services. Innovative measures of arranging short term finance have also come up. The need of the hour is to increase reliability in the MSME sector and provide greater transparency and confidence among investors.

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