Digital lending solutions for MSMEs

Digital lending is becoming a widely popular financing option among MSMEs. The number of online money lending platforms and Neobanks are skyrocketing seeking to access the credit demand among MSMEs and individuals. Relaxed approval norms and faster processing times are the major reasons why small businesses are attracted to digital lending solutions.

The rise of fintech lenders

The early pioneers of the fintech sector set out to fill the credit demand gap experienced by businesses, especially MSMEs. Traditional banking often denied loans to small businesses since they thought that the risk of investment would be high. Traditional banking system had several reasons for denying MSME loan applications:

• Business has only been in existence for a short period of time
• Small ticket size and high transaction cost
• Low credit rating
• Absent collateral

To capture this market, fintech players started marketing digital banking services like online business loan in minutes. Fintech lenders used data analytics, AI, ML and Open Application Programming Interface (API) to gather data on consumer spending patterns to build alternative credit models and provide credit.

This led a flock of personal loan borrowers to their websites. However, MSME borrowers are still lagging when it comes to applying for loans from digital lending platforms.

Traditional banks are also now coming up with online loan schemes to compete in the digital lending space and retain their loyal clients and attract new ones.

Digital lending for MSMEs

According to a report (Report of the working group on digital lending including lending through online platforms and mobile apps) published by RBI in 2021, the percentage share of total SME loans disbursed through digital channels of scheduled commercial banks and NBFCs was recorded at 3% and 0.72% respectively.

While commercial banks follow the same eligibility criteria for business loans online, NBFCs and fintech companies have relaxed conditions of online lending. MSME digital lending is improving gradually with small businesses slowly realising the benefits of digital lenders. Low access to credit has pushed many MSMEs to choose digital lending while some are still not very aware of the advantages of digital SME lending.

What are digital lending solutions?

Digital lending solutions are lending institutions with online loan products that allow you to borrow loans online with just your phone or your computer. The complete process is done online including the loan application form and document submission.

The lender institution sometimes sends a person to verify your identity and your business location before approving the loan. You don’t have to visit the online lender’s place of business for getting the loan arranged.

Benefits of digital lending solutions

Digital lending solutions have brought easy access to small business loans and convenience to the business loan application process.  There are multiple benefits of digital lending that can be advantageous to credit seeking MSMEs:

• Uncomplicated on-boarding/KYC processes
• Speedier approval of credit particularly for small loan amounts
• Instant disbursals that are seamless, automated and personalised
• Replaces manual form filing with digital data captures
• Automated evaluations using technologies like advanced analytics, artificial intelligence (AI) and machine learning (ML)
• Determines creditworthiness of a business based on cashflow data and other data from sources such as telecom, utility and social media, combined with psychometric analysis that evaluates ability and willingness to pay
• No or little in-person visits to get a loan sanctioned
• Lowers operational costs

How digital lending is overcoming limitations of traditional banking?

Banks, NBFCs, and multiple finance companies, are the traditional lenders of the country. Let us see how new age digital lending solutions overcome the limitations of traditional lending.

Limitations	How fintech lenders overcome the limitations
Banks and NBFCs require physical verification and have defined transaction charges for loan sanctions	Utilises digital footprint as a substitution for physical verification and lowers operational costs compared to conventional lending.
Banks, multi finance companies and NBFCs require good credit score/history	Measure various data points other than credit history like the cash flow, utility bills paid, etc., to assess repayment ability
Lot of paperwork involved in manually filling loan applications	Completely digital application process
Time consuming loan application and approval process	Cut down the turnaround time significantly by automating the application assessment and relaxing the eligibility criteria.

Digital lending models in India

Given below are the digital lending models prevalent in India for businesses:

• Invoice financing– Short-term funds/working capital credit given to MSMEs based on their unpaid customer invoices.
• Supply chain financing – Loan given to pay up a supplier on the behalf of the customer (MSME).
• Crowdfunding – Digital platforms that enable businesses to raise external credit from a large group of investors, by allowing the former to present their business cases, funding requirement and market potential of their product/service.
• P2P lending – Digital marketplaces that connect borrowers with lenders, allowing quick access to low-cost loans.
• Mobile lending – Lenders that offer mobile loans to customers by assessing their creditworthiness using mobile phone data such as call patterns and mobile e-Money usage.

There are other fintech companies with attractive small business loan programmes like ‘Repay loan daily’. Online lending platforms are still developing in India and is predicted to come up with more digital lending solutions that can help small businesses prosper.

Platforms like Tata nexarc compare offers from multiple lenders to give you the best offer once you submit your loan application. The loan application is online, with minimum documentation and you can get a loan offer within 5 minutes.