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How Working Capital Loan is a Challenge Faced by SMEs

By Surbhi Mehtani

11 Min Read

Updated On 06-02-2026

Cover expense gap
Expansion plans
No collateral required
Reasons why working capital loan is a significant hurdle for SMEs
How working capital loans problem can be solved?
Need for Working Capital Loans for MSMEs
Ways to make the best use of a working capital loan
Types of Best Working Capital Loans for MSMEs
What is the process for applying for a working capital loan?
Eligibility Criteria for Working Capital Loans
Documentation Requirements for Obtaining Working Capital Loans
The Bottom Line

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How Working Capital Loan is a Challenge Faced by SMEs

Working capital is the amount a business needs to keep its current business operations running on a day-to-day basis. Working capital financing is when a business seeks financing to cover these daily expenses. There are numerous working capital finance options available to growing companies both in the long-term and short-term mode. An optimum option for a quick or short-term working capital fix is to apply and get a corporate credit card with many features. It is crucial to keep all the viable options in mind when your business looks for working capital finance, no matter the purpose for which you seek the working capital.

Cover expense gap

Often, the terms you have offered your customers may be lenient compared to those you receive from your suppliers. This could result in insufficient funds to pay your suppliers on time. A simple solution could be arranging a quick and straightforward working capital loan. This could be as simple as talking to your corporate credit card provider to enhance your credit limit or simply start using the card smartly.

Expansion plans

Businesses often plan to expand their operations to different geographies or work areas, which, in turn, require extra funds to pay for operational expenses as revenues may take time to start flowing in.

No collateral required

If your business has a good relationship with your bank, it can raise working capital loans without collateral, easing your operational requirements. Corporate credit cards from a good solution provider are a good way to ensure working capital without providing collateral to secure the finance.

Reasons why working capital loan is a significant hurdle for SMEs

One of the many reasons why working capital loan is a major hurdle for SMEs is because most of such businesses are highly unorganized. As such, the majority of transactions are done via cash and are unaccounted for in the books. Since payables, expenses, turnovers, inventory, etc., are not accurately mentioned or provided, it becomes quite a challenge for financial institutions and lenders to make a decision regarding their creditworthiness, and thus, the working capital loan offered to such firms is limited.Most banking institutions today are unwilling to enter into agreements for working capital loans for SMEs as they consider it a high-risk proposition.Another primary reason adding to why the banking and funding institutions consider some SMEs high risk is because of the lack of collateral. While credit score can still be excused for new businesses, lack of assets hinders the process of procuring a loan. Hence, banks hesitate, and this vicious cycle continues. Even if banks and other such institutions decide to go ahead and give a working capital loan, the interest rates are much higher when compared to other loans. This, in turn, cuts down on the profits, and hence, the benefits of a loan are entirely negated.Also, the working capital loan interest rate has been known to have been increased drastically.The lack of tailor-made solutions is the third-factor limiting working capital loans to SMEs. Since these small to medium enterprises cater to different services and products, there is no clear solution for the banks to adhere to. This is solely owing to the fact that credit requirements for one SME will drastically vary from another.While this indeed paints a bleak prospect, the future may not be so. With the advent of technology and data analytics, this deficit can be reduced manifold. Similarly, adopting digitization for financial transactions for SME working capital loans, inventory, etc., helps paint a clear picture and enables brand evaluation for prospective loans and further financing.

How working capital loans problem can be solved?

Newer risk models should be introduced by dynamic credit agencies that can learn over time. Furthermore, the growing fintech firms and platforms can also reduce the working capital loan deficit. These fintech firms can provide a steady influx of cash to SMEs with corporate or business credit cards with attractive interest rates. This way, the growing fintech firm and the business they’re funding will gain good returns.Moreover, more than one type of payment plan should be introduced to give SMEs a choice in opting for the right plans of repayment for working capital loans. Financial techniques such as tiered disbursal schedules, equity repayment plans, and performance-linked debt plans can help in maximizing investment potential. A few other options for SMEs include leasing assets, listing on the stock exchange, and funding from an angel investor.The growth and potential of Indian SMEs are immense. Embedding technology and financial solutions into the SME ecosystem will turn the tide in the lending space and change the current scenario of asset-based financing to transaction-based financing.These SMEs can play a pivotal role in pushing India’s economy forward by tapping into the right resources and adopting better technologies and infrastructure.Small and medium-sized businesses encounter several problems in their daily operations. Credit rationing, insufficient financing, a lack of appropriate documentation, a lack of collateral, rules, and excessive interest rates are among the problems.These difficulties have an impact on growth, profitability, and financial innovation. Based on the data, the study found that the aforementioned are primary financial issues that SMEs face in their day-to-day operations. These financial issues regarding working capital loan for startups significantly impact the success of SMEs.This blog is written with the intent to help SMEs understand and manage their financial affairs better, specifically those related to working capital loans. It showcases the benefits of applying for and obtaining a corporate credit card along with a spend management platform to help with working capital needs, payment of expenses, and other payables. It will help them enhance their growth, profitability, and financial innovation performance.

Need for Working Capital Loans for MSMEs

Micro, small, and medium enterprises are vital to our economy as they encourage entrepreneurship and provide employment to many skilled and unskilled workers. However, since most business owners in this sector are first-generation entrepreneurs, they lack the access to funds that a seasoned corporate business may have. Many factors are affecting their working capital and operations, as given below.

1. Dealings with other small businesses

Often, MSMEs deal with other smaller businesses that do not have ready access to working capital, which means that the accounts receivable cycle could take longer than usual. This, in turn, affects their cash balance and ability to keep their business running.

2. Lack of support by bigger banks

Since smaller and medium businesses run on minimal resources, they may lack the personnel to liaise with banks, affecting the support bigger banks offer them.

3. Poor access to financing options

There are resources beyond banks offering financing to smaller businesses, but smaller businesses may not be aware of these resources and, therefore, miss out on accessing them.

4. Inability to seek financial assistance

Financial assistance requires preparing a business plan, financial projections, and the ability to convince the lending institution of its stability and repayment capabilities. This can result in a lack of working capital loan access.

Ways to make the best use of a working capital loan

Working capital loans can be used in many ways to expand your business and ensure you continue serving your customers seamlessly. Here are some ways to optimize your working capital loan.

1. Ensure supplies are timely and of good quality

An excellent use of the funds you access via working capital loans is to ensure that the quality and timeliness of supplies required for your business are in place. Paying your suppliers on time will give you uninterrupted supplies and take advantage of discounts for timely payments.

2. Build goodwill with all business stakeholders

Your business stakeholders, like suppliers, vendors, shareholders, auditors, employees, and government agencies, must be paid as warranted and on time. A good line of credit will ensure you can continue building goodwill with all stakeholders by meeting your commitments on time.

3. Put into action expansion plans

As a growing business, you can use working capital funds to implement your expansion plans as it provides easy and quick access to funds. It ensures that the gap between receivables and payables does not affect any plan you may have to increase the scope of your business.

4. Build a good credit score with banks

When you avail of working capital loans from banks or other financial institutions and repay them regularly and on time, it helps you improve your credit score. This, in turn, can be used to avail longer-term sources of finance.

Types of Best Working Capital Loans for MSMEs

Here are some working capital categories that MSMEs can avail of.

Corporate credit card

Many corporate credit cards specifically for SMEs offer them a generous credit limit, attractive repayment terms, and many other incentives. EnKash is one such platform that helps in solving short-term working capital problems by providing corporate cards to small and medium businesses in partnership with various banks.

Short-term working capital loan

As the name denotes, this loan is offered for the short term and needs to be repaid within a shorter period.

Long-term working capital loan

This kind of loan is given to businesses in the long term to grow or advance their expansion plans.

Bill discounting

Invoices due from long-term customers who have good track records are discounted, and the funds can be availed as working capital.

Credit line or overdraft

The bank can offer a line of credit or an overdraft facility so that the business can use it for working capital.

Letter of credit

This is a letter to a supplier to ensure timely payment and that supplies continue uninterrupted.

Bank guarantee

This non-fund-based facility offers the supplier a guarantee to overcome fears that a project will not be completed.

What is the process for applying for a working capital loan?

Contact the bank or financial institution you have a running relationship with to understand the process for applying for a working capital loan. Understand the bank or financial institution's requirements for sanctioning an SME working capital loan.You will be provided with a loan application and the required documents. In most small businesses, you must provide identity proof and financial documentation for the best working capital loans for the owners, partners, or directors and the business financial information. Ensure you get all the documents audited and attested per the loan authority’s requirements. Work with your finance and sales team to get realistic projections for the business in the prescribed format. Create projected sales, revenues, and profits to show your financial stability. If possible, talk to your bank or financial institution liaison officer to check if all the documentation meets the requirements. Once the documents are checked, submit them to the portal or to the loan officer.

Eligibility Criteria for Working Capital Loans

The business owner’s age has to be between 21 and 65 years old to qualify for the loan. However, in the case of an NBFC, the age limit is 24 to 70 years
Business should have been in existence for the past 3 years to be eligible for a SME working capital loan
A business proposal with current financials, including the current state of payables, should be in place
The business must have projections for the future along with projected income to showcase
All documents around loans that the company has taken and repaid successfully must be produced
All the possible list of assets the business owns that can be showcased as collateral to secure the loan

Documentation Requirements for Obtaining Working Capital Loans

Identity proof for the business, like registration, GST number, PAN, etc
Documents related to the owners, partners, or directors, like PAN cards, Aadhar cards, financial records, and passport-size photographs
Establishment certificate and incorporation certificate of the company
Balance sheets, profit and loss accounts, and tax records for the past two years
Order book and list of potential revenue expected from these orders

The Bottom Line

Many small enterprises begin with a lot of promise and great visions. The creator is brilliant and visionary, the first crew is hardworking and imaginative, and the venture’s concept is sound. Unfortunately, many promising small enterprises collapse, frequently within the first year or two, due to financial difficulties that all entrepreneurs encounter. As an entrepreneur or small-business owner, you must be aware of the financial traps that many companies face as they strive for success. You need to apply a working capital loan for MSME, which enables easier documentation and approvals.EnKash is a fintech company that helps small and medium organizations in securing working capital finance with minimum documentation and a speedy process.To know more, visit: EnKash.com. You can also click below on Signup Now, and we will reach out to you soon.

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Surbhi Mehtani

A marketing professional with a curious mind for fintech and digital finance. Enjoys thoughtful observations, sharing a point of view, and the occasional meme. Proud owner of an ever-growing collection of saved Instagram reels.

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How Working Capital Loan is a Challenge Faced by SMEs

Table of Contents

Summarise with AI

Cover expense gap

Expansion plans

No collateral required

Reasons why working capital loan is a significant hurdle for SMEs

How working capital loans problem can be solved?

Need for Working Capital Loans for MSMEs

1. Dealings with other small businesses

2. Lack of support by bigger banks

3. Poor access to financing options

4. Inability to seek financial assistance

Ways to make the best use of a working capital loan

1. Ensure supplies are timely and of good quality

2. Build goodwill with all business stakeholders

3. Put into action expansion plans

4. Build a good credit score with banks

Types of Best Working Capital Loans for MSMEs

Corporate credit card

Short-term working capital loan

Long-term working capital loan

Bill discounting

Credit line or overdraft

Letter of credit

Bank guarantee

What is the process for applying for a working capital loan?

Eligibility Criteria for Working Capital Loans

Documentation Requirements for Obtaining Working Capital Loans

The Bottom Line

Summarise with AI

Got Questions?

Surbhi Mehtani

Related Resources

EnFin: Your Fresh Source of Fintech Updates (July 2026 Edition)

EnFin: Your Fresh Source of Fintech Updates (June 2026 Edition)

EnFin: Your Fresh Source of Fintech Updates (May 2026 Edition)

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