By: Cheruku Srikanth, Founder & CEO, Digital CFO
MSMEs are considered high-risk borrowers with few assets and low capital, making it difficult to avail financial support from formal credit sources. Lack of formal accounting systems, inadequate documentation of financial records, challenges in determining creditworthiness, a limited or nonexistent credit history, a lack of collateral, etc. are some of the causes.
The strict eligibility requirements of banks to offer credit and the complex processes have created a major barrier for businesses to acquire funds to start, grow, and expand. The lack of formal credit options has forced businesses to turn to informal sources of credit with high interest rates.
The need for tech-powered accounting automation
The advancement of technology and the rise of artificial intelligence is a promising solution for promoting the financial transparency of MSMEs. Most of the problems mentioned above- be it non-documentation or the inaccurate financial books by the company have already been addressed by its presence. The growth of accounting automation tools makes it simpler for businesses to manage their finances, and the likelihood that they may get loans from financial institutions to cater to their diverse daily operation needs, as well as further expansion and growth, is higher.
Digital accounting and accounting information systems will enable businesses to manage their finances intelligently. MSMEs will have attracted benefits from the automated accounting operations, such as accuracy and efficiency. The financial reports will be comprehensive, and the error rates of manual operations will be lower, among other things.
Businesses can use these tools and systems to gain access to credit by providing a clear picture of their financial health and performance. They can make better decisions with the help of real-time insights into overall finances, cash flow, profit margins, etc.
Digital platforms for MSMEs’ financial inclusion
MSMEs’ financial inclusion is greatly aided by digital platforms that offer automated accounting solutions. These automated accounting tools can be used by businesses to manage accurate records of finances and generate detailed and up-to-date reports. The history of transactions and cash flow data provides proof of the creditworthiness of the business. This can be shared with lenders to make financial support available.
Automating tasks such as bookkeeping, invoicing, and financial reporting with automated accounting tools on digital platforms helps businesses enhance productivity. AI and data analytics can be utilised to do financial assessments of businesses using the platform’s financial data.
Bridging credit gaps using AI-based credit scoring
AI and machine learning are being used to assess creditworthiness in order to close the loan gap for MSMEs. Banks use credit scoring algorithms to determine a company’s creditworthiness before granting credit for financial support. Traditional credit scoring systems are based on the credit history and financial data of MSMEs. AI-driven finance is a different and effective approach that offers MSMEs and lenders several advantages.
An AI credit score model examines data to find trends using elements such as transaction histories, digital footprints, cash flow components, and internet activity. The approach provides micro, small, and medium-sized businesses with a comprehensive understanding of creditworthiness, enabling them to access additional financing choices.
Tech-powered accounting in the future and growth of MSMEs
Tech-powered accounting tools and systems have transformed the financial management of MSMEs with the inclusion of AI and machine learning. It has resulted in streamlined operations, accurate records, improved decision-making, and much more. These tools help businesses with financial forecasting, fraud detection, etc., for better financial management and to navigate the evolving marketplace.
Technology advancement and innovation, including AI-driven data analytics and cloud-based solutions, are game changers for MSMEs. It has increased the likelihood of obtaining funding from banks and official credit sources, enabling companies to develop and flourish while successfully closing the credit gap. Despite some of the concerns and problems with these technologies, including security issues and the requirement for staff to handle AI insights, they provide many benefits. Using the current technologies, MSMEs can do a better job of financial transparency and management, which should keep them adequately armed to acquire finance.