One of the hottest topics in the banking world this year is lending solutions for SMEs. A sudden increase in alternative lenders targeting SMEs, and a surge of innovation from traditional lenders in SME propositions – such as commercial cards and working capital loans – have highlighted the extent to which SMEs have been, and continue to be, under-served since the financial crisis.
SMEs are of critical importance to the British economy. As the CEO of Boost Capital, Alex Littner explained at the 2016 Banking Horizon conference, small businesses drive growth, generate jobs, create hubs of innovation and challenge the status quo. They employ about 60% of the overall workforce and are therefore crucial for a healthy and growing economy.
However, access to capital has long been a challenge for SMEs. Until recently, funding applications for SME loans and commercial credit products often involved cumbersome processes with long waiting times. A recent Deloitte study indicated that the funding gap for SMEs in the UK has increased from £5bn in 2012 to an estimated £20bn this year.
The good news is that over the last 12 months, lending to SMEs has started to increase and is continuing an upwards trend. This creates the perfect environment for both incumbents and new lenders to showcase their innovation and develop exciting new propositions for this vital market.
Fintech companies have recognised SME lending as an under-served area in the market, and disruption has entered this space fast. As fintech companies compete with established lenders, the number of options for business funding has increased. The perception that fintechs are all about creating an algorithm-based world is incorrect, as the most successful alternative lenders have understood the important balance between algorithm-led decisions and maintaining the human touch. Some of the larger players, such as Funding Circle, offer multiple different ways of raising capital to SMEs; from crowdfunding to business loans.
Product innovation in SME lending has also required fundamental changes in business models. The ideal SME proposition should incorporate the following key factors:
- Speed – Fast decision making and short waiting times for receipt of funding
- Simplicity – Easy to understand processes
- Flexibility – Flexibility with use of funds and repayment processes
An increasing number of traditional banks are also improving their products to better support SMEs. A commercial card product can be viewed as a lending tool for SMEs, and can also play a role as a different type of working capital solution to help SMEs manage cash flow. However, commercial credit and cards remain an under-utilised product for SMEs in the UK. One in five SMEs with turnovers of under £500,000 still use their personal credit cards to make business ends meet.
The future of the SME lending space is very exciting, and the combination of digital transformation changes and new ways of working will result in more innovative solutions in the SME lending arena. We always advise our clients to embrace this market by developing products that integrate seamless user interaction with digitally native solutions.
Jen McNaught is a consultant at financial services innovation company Strategy Desk