In the fast-changing financial environment of today, digital borrowing is the buzzword among small and medium-sized enterprises (SMEs) that wish to drive growth. With the lure of instant disbursals, little paperwork, and technology-based ease, digital loans from fintech platforms, NBFCs, and even banks are increasingly becoming desirable.
But whereas the rapidity and convenience of digital borrowing can bring genuine benefits, there are also unforeseen dangers that must be assessed by SMEs before tapping “Apply Now.”
Points to be Covered:
- What is digital borrowing?
- What are the primary opportunities it brings?
- Where are the potential threats?
- How can SMEs borrow more wisely in the digital age?
What Is Digital Borrowing?
Digital borrowing is taking credit from online channels, mobile applications, or technology-based processes. It varies from banking borrowing with respect to how the loan is assessed, approved, and serviced. Gone are the days of tedious meetings, paperwork, and branch visits—you do everything online, at times in less than 24 hours.
Key participants offering digital lending:
- Fintech lenders (e.g., Lendingkart, Indifi, Razorpay Capital)
- NBFCs with digital-first processes
- Digital banks and neobanks
- Payment gateways providing credit lines (e.g., through POS transactions)
Typical products:
- Working capital loans
- Term loans
- Invoice financing
- Business Buy now, pay later (BNPL)
- Merchant cash advances
The Opportunities: Why SMEs Are Turning to Digital Lending
Speed and Convenience
Digital lenders tend to offer approvals in 24–72 hours. For SMEs with tight cash cycles, this speed can be invaluable.
In contrast to conventional banks, which can take weeks to approve a loan application, fintech platforms utilize automated credit ratings, access your bank feeds or GST returns online, and transfer directly to your account.
Less Documentation
If your business already has:
- GST returns
- ITR filings
- Bank statement integrations
You might not need paperwork at all. Most platforms utilize APIs to automatically fetch and check documents.
New or Underserved Borrower Access
Conventional banks usually steer clear of:
- New enterprises (less than 3 years)
- Low turnover companies
- Service sector SMEs with intangible assets
Digital lenders can provide unsecured working capital loans to such segments by using alternate data—such as volume of transactions, e-commerce performance, or POS sales.
Smaller Ticket Sizes
SMEs requiring ₹1 lakh–₹10 lakh tend to find it difficult to attract the attention of large banks. Digital platforms are expert at micro-credit and short-term facilities.
Flexible Use Cases
Many digital loans are not tied to a specific asset or capex purpose. This flexibility makes them ideal for times when conventional lending cannot meet the SMEs unconventional cash flow requirements.
- Stocking up for festive seasons
- Managing payroll
- Paying vendors
- Bridging customer payment delays
The Risks: What SMEs Must Watch Out For
While digital borrowing brings speed and flexibility, it also comes with fine print and risks that traditional bankers would usually walk you through in person.
High Interest Rates
Online loans tend to have a higher effective rate of interest—even when the monthly EMI seems tiny. It is not rare to find annualized interest rates going over 18–30%.
Be cautious of:
- Flat rates (which are lower in appearance but higher in total cost)
- Processing fees + prepayment penalties
- Weekly or fortnightly repayment schedules which strain cash flow
Short Tenures and Regular Repayments
The majority of online loans are short-term, between 3 and 12 months. A few even ask for repayment in short intervals—something that can put pressure if your business operates seasonally.
Ask before you borrow:
There are many questions that pop up when you decide to make the final call on digital borrowing; like:
- Is the payment cycle matched to your receivables?
- Will prepayment save interest, or will you still be charged for the full period?
Limited Negotiation and Human Support
Online platforms favor automation. What that means is:
- Less leeway to negotiate terms
- Limited relationship management
- Generic customer service after disbursal of the loan
This absence of personalized banker guidance is a problem if your business suddenly experiences delays or requires restructuring.
Credit Score and Future Credit Risk
Most SMEs treat digital loans lightly—it’s just ₹2 lakh for 6 months. But, failing to pay or postponing even a small digital EMI can damage your:
- Bureau score (CIBIL, Experian)
- Internal credit rating for future bank loans
- Financing availability in the next 2–3 years
Digital lenders tend to report data faster and more aggressively than traditional banks.
Temptation of Over-Borrowing
The “easy approval” aspect of digital credit tempts SMEs to borrow multiple small loans—with a debt trap. This is particularly dangerous when there are varying repayment cycles per loan, Cash flow becomes unmanageable or you’re borrowing to repay other loans.
Borrowing must support business growth, not be a survival cycle. We at BankKeeping can help you through your business loan journey. Ask us how?
Smart Ways to Use Digital Borrowing
This is how SMEs can leverage digital credit without getting trapped into debt:
Step 1: Take for Specific Purposes
- Don’t borrow vaguely. Use only if you have a specific requirement, like:
- Pre-paying vendors for bulk discount
- Covering 45-day receivables
- Handling a surge in orders
- If the loan fails to fetch ROI or cash flow relief—rethink.
Step 2: Shop Among Multiple Platforms
- Utilize loan aggregators or fintech marketplaces to compare:
- Effective interest rates (not only EMI)
- Processing & service fees
- Repayment flexibility
- Pre-closure conditions
Step 3: Sync Loans with Revenue
- For periodic businesses, find lenders that provide:
- Tailor-made repayment timelines
- Bullet repayment facilities
- Cash flow-driven limits
Step 4: Use Digital Loans to Build Credit History
If you have no experience of formal credit, a small online loan can assist you in:
- Establishing a good repayment history
- Increasing your credit rating
- Becoming eligible for larger, cheaper loans from banks in the future
But only if you pay back on time, each time.
To Conclude
Online borrowing is a tool for SMEs with pressing, short-term requirements and restricted access to conventional finance.But as with any powerful weapon, they need to be applied judiciously. Pricy rates, steep repayment terms, and minimal flexibility can convert opportunity into hazard if you’re not careful.
The secret lies in:
- Being aware of your own cash cycles
- Aligning borrowing for sound business purposes
- Carefully reading the print
- Actively monitoring debt health
Do you need guidance in assessing or dealing with business loans for your firm? BankKeeping assists SMEs:
- Compare financing
- Assess repayment ability
- Steer clear of over-leverage
- Enhance creditworthiness for future loans