We’ve said this many times here: MSMEs are truly the backbone of the Indian economy, because it is the sector that serves other sectors. MSMEs span manufacturing, services and trade, generating employment, supporting exports, and contributing significantly to economic growth.
The Ministry of MSME identifies the sector as one of India’s largest employment generators after agriculture. However, despite being such an important pillar of the economy, MSMEs have long faced structural challenges such as access to finance, technology, markets and delayed payments. But that is beginning to change, thanks to a new wave of fintech companies that are building the financial infrastructure supporting India’s MSME ecosystem.
In this two-part story, we’ll first look into the financial ecosystem that MSMEs rely on, followed by the smallcap companies that are an important part of the system.
The financial requirements of MSMEs
Despite their economic importance, one of the biggest challenges facing MSMEs is not demand, but managing day-to-day finances efficiently. Loans are not the only financial instrument MSMEs need access to. Running a business requires much more than access to credit: MSMEs need to collect payments digitally, reconcile transactions, finance inventory, purchase equipment, manage receivables and access working capital without disrupting operations. As businesses become increasingly formalised and digitised, these financial services are becoming as important as credit itself.
| Problem | Solution |
| Accepting customer payments and collecting payments on time | Digital payments, invoice financing and faster digital collections |
| Managing working capital | MSME lending and working capital loans |
| Securing funding and financing for inventory, machinery, equipment, commercial vehicles and two-wheelers | Merchant and inventory financing, machinery finance, commercial vehicle and two-wheeler loans |
| Bridging the gap between raising invoices and receiving payment | Invoice financing or invoice discounting converts outstanding invoices into immediate working capital via financiers |
| Accessing formal credit despite limited collateral | Cash-flow underwriting assesses creditworthiness using GST and banking data instead of relying only on collateral |
| Managing supplier and dealer relationships | Merchant and supply-chain finance |
| Digitising customer payments and collections | Digital payment infrastructure |
| Reducing manual financial processes | Payment infrastructure, embedded finance and AI-powered enterprise tools |
| Using business data to make better financial decisions | AI-powered analytics and data-driven financial tools |
| Managing working capital | MSME lending and working capital loans |
Financing business operations
Running a business involves more than making sales. MSMEs need financial tools that help them collect payments, manage cash flow, reconcile transactions and keep day-to-day operations running smoothly.
→ Digital payments
Digital payments allow businesses to accept payments through UPI, cards, QR codes, payment gateways and other digital payment channels. Here’s how it helps:
- Speeds up customer collections
- Reduces cash dependency
- Makes payments convenient for the customer
- Creates digital transaction records that can later support lending, compliance and business analytics
→ Payment infrastructure
These provide the APIs (communication software) rails (money transfer infrastructure), and merchant technology that businesses integrate into websites, mobile apps, billing software, ERP systems and enterprise platforms. Here’s how it helps:
- Enables businesses to sell through digital channels
- Automates payment processing and reconciliation
- Supports subscriptions, recurring payments and embedded financial services
- Forms the technology layer that connects merchants, banks and payment networks
→ Invoice financing ecosystem
A good invoice financing system allows MSMEs to receive early payments against approved invoices instead of waiting for buyers to pay, which may take anywhere between 30-90 days. Platforms operating under the RBI-regulated Trade Receivables Discounting System (TReDS) connect MSMEs, buyers and financiers for invoice discounting. Here’s how it helps:
- Unlocks cash tied up in receivables/payments
- Improves liquidity without taking a conventional business loan
- Reduces dependence on informal borrowing
- Helps businesses maintain smoother working capital cycles
Financing the business itself
Growing a business requires capital. Whether it’s funding inventory, purchasing machinery, expanding operations or bridging temporary cash-flow gaps, MSMEs rely on a range of solutions beyond traditional bank loans.
→ MSME lending
It provides business loans to finance working capital, inventory purchases, business expansion, equipment acquisition and other operational requirements. It helps by:
- Giving businesses support to bridge cash-flow gaps
- Enabling business expansion without relying entirely on internal accruals
- Supporting investment in growth opportunities
→ Cash-flow underwriting
This tool uses GST returns, banking data, bureau information and digital transaction history to assess borrowers instead of relying solely on physical collateral. It helps MSMEs by:
- Expanding access to formal credit
- Enabling faster loan approvals
- Better reflecting the operating performance of businesses with limited tangible assets
→ Merchant finance
Provides financing to dealers, distributors, retailers and other supply-chain participants to purchase inventory and manage working capital. It helps by:
- Keeping inventory moving through supply chains
- Improving liquidity for channel partners
- Supporting business growth without requiring large upfront capital
→ Machinery finance
Provides loans for manufacturing equipment, machinery and other productive assets. It helps by:
- Enabling businesses to expand production capacity
- Improving productivity
- Allowing MSMEs to modernise operations without significant upfront investment
→ Partnership and embedded lending
These lenders provide loans to MSMEs, merchants, retailers, distributors and small business owners through fintech platforms, OEMs (equipment manufacturers), marketplaces, NBFCs and other financial intermediaries. It helps by:
- Making credit available where businesses already operate
- Reduces paperwork and shortens turnaround times
- Expands access to formal credit beyond traditional branch-based lending
As more than 60 million MSMEs continue to digitise, the companies building this infrastructure could play an increasingly important role in enabling productivity, improving access to finance and supporting the sector’s long-term growth.
In Part 2, we spotlight five listed smallcap companies—UGRO Capital, AvenuesAI (Infibeam Avenues), SBFC Finance, MAS Financial Services and Satin Creditcare Network—to understand how each is addressing a different financial challenge faced by India’s MSMEs, and where they fit into this evolving ecosystem.
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