How fintech firms filling the financing gap for India's booming SMB sector

The future of SMB financing lies in a collaborative approach, with a convergence of fintech advancements, supportive regulations, and increased awareness. This perfect blend holds the key to unlocking the true potential of India's thriving small and medium businesses

Small and medium-sized businesses (SMBs) financing gap in India is an exciting opportunity for fintech founders. The peaking startup ecosystem in India presents vast opportunities for SMB financing as more entrepreneurs emerge, needing capital to grow their businesses.

However, the challenge lies in the lack of comprehensive data for underwriting loans, as many SMBs either do not have established credit histories or rely on alternate data sources. This situation presents a dual opportunity: to fill the financing gap and to innovate in credit evaluation techniques.

Talking to Bizz Buzz, Kunal Varma, CEO and Co-founder at Freo, said: “Fintech in India is closing the financing gap for SMBs by utilising digital tools and data analytics. They integrate diverse digital data sources, including transaction histories and online platform activities, to assess creditworthiness.”

This allows fintechs to offer customised financial products like invoice financing and adapt to SMBs' unique needs. Technologies such as blockchain enhance transaction security and trust, while mobile-first solutions ensure wider access, even in remote areas, he said.

The percentage of women-led businesses in India remains quite low, which has prompted some fintech companies and financial institutions to offer special programs and preferential rates to support these entrepreneurs.

For example, Freo provides preferential interest rates on credit lines to women, mirroring the special home loan rates available to them. These initiatives are designed to encourage more women to start and scale their businesses by making financial services more accessible and tailored to their needs.

By leveraging technology to streamline processes and reduce costs, fintech founders are not only addressing previously uncharted market segments but also optimising the return on investment. They achieve this by lowering operational and underwriting costs and enhancing revenue through customized financial offerings. These digital processes enable scaling these solutions efficiently, allowing fintech companies to offer more tailored financial products.

This approach drives financial inclusion and supports the growth of the SMB sector by making it feasible to serve a wider range of businesses at lower costs, thus expanding the reach and impact of their financial solutions.

While embedded financing offers a sophisticated solution, its reach can be limited. Sachet-sized loans, which are small, manageable loans tailored to the immediate needs of a borrower, might be more effective in reaching a broader audience, especially in rural or underserved areas where small, frequent credit is needed.

Fintechs are now able to analyze vast amounts of alternative data for credit scoring, reducing reliance on traditional credit histories and expanding access to credit for SMBs by utilising AI, LLM, and deep learning modules.

In the intricate web of SMB financing, fintech emerges not only as a beacon of hope but also as a catalyst for profound change. Through the seamless fusion of technology and innovation, fintech pioneers are not simply disrupting traditional lending models, but are also igniting a revolution that is empowering the SMBs across India. By harnessing the transformative power of AI, machine learning, and data analytics, fintech platforms are democratising access to financial tools and insights previously restricted.

“Embedded financing and sachet-sized loans present distinct paths toward financial inclusion, each with its own merits. Embedded financing seamlessly integrates financial services into existing platforms, prioritizing convenience and accessibility,” Roshan Shah, the Co-founder and CEO of VoloFin said.

However, it's the convergence of these innovations, bolstered by regulatory support and awareness campaigns, that holds the key to unlocking the full potential of SMB financing in India. Fintechs are not merely about providing loans; it's about offering pathways to prosperity, propelling economic growth, and instigating positive change across diverse sectors, he said.

Addressing the challenge of working capital, fintech offers tailored solutions catering to the dynamic needs of SMBs, including export financing. By providing quick and hassle-free access to funds, streamlined application processes, and personalised lending options. In essence, fintech serve as a steadfast ally, enabling SMBs to overcome obstacles and flourish in an ever-evolving market environment while facilitating their participation in global trade through export financing solutions.