Small and medium-sized enterprises (SMEs) are the backbone of the UK economy. There were 5.9 million SMEs in the UK at the start of 2020, accounting for 99.9 per cent of the business population. However, SMEs have also been some of the worst-hit companies during the coronavirus pandemic so, while they will play a crucial role in the country’s economic recovery, SME lending will be vital.
Almost £65.5 billion has been delivered to nearly 1.5 million businesses through the government’s COVID-19 support schemes so far. Figures from the British Business Bank show the bounce back loan scheme (BBLS), which delivers 100 per cent government-backed loans of up to £50,000 to smaller businesses, has proved most popular, deploying loans worth £42.18 billion. This was followed by the coronavirus business interruption loan scheme (CBILS) which has delivered loans worth £18.46 billion.
However, Josh Levy, chief executive of Ultimate Finance, a finance provider focused on SME lending, says the concern is now what lies beyond BBLS and CBILS, and what access to funding SMEs will have in 2021 and thereafter.
“High street lenders have lent considerable sums under these schemes and are unlikely to have significant appetite to advance further funding to SMEs,” he says. “Risk appetite has been supported by the government guarantee and it remains to be seen what impact any successor scheme has on appetite. Coming through the worst of the pandemic, balance sheets will be in a weaker position with higher debt and lower profits to support; this will constrain the ability for SMEs to secure more traditional cash-flow or unsecured loans.”
Levy believes, given those factors, alternative funding solutions provided by independent lenders and fintech companies will have a huge role to play in continuing to provide working capital to SMEs. Specifically, he cites fintech’s better deployment of technology, more flexible lending criteria, it’s ability to make decisions based on current or live data rather than historic data, and its relationship-driven business model.
Blow dealt to small business lending
However, SMEs were faced with unforeseen challenges when it came to securing funding this year. The Times reported in July that non-bank lenders, including fintech companies and peer-to-peer lending platforms, had been denied access to low-cost funding from the Bank of England to deliver emergency government loans.
This is seen as a huge blow for SME lending, as many small businesses struggle to get state-backed finance via mainstream banks during the pandemic.
“One of the critiques of the government schemes is they didn’t initially allow in many alternative lenders and instead relied primarily on incumbents to deploy capital. Businesses that didn’t meet the requirements of the programme or that weren’t already existing customers of one of the named banks were often left short of options,” says Justin Fitzpatrick, co-founder and chief executive of DueDil, a platform that delivers company intelligence to help onboard SMEs.
“But make no mistake, the lenders were presented with a massive challenge. They were being asked, out of necessity, to lend nearly ten times their annual lending volume in a shorter space of time. This challenge was made more difficult by the fact many lenders lacked the processes, technology and data to make fast, accurate decisions about which customers to onboard and lend to.”
Leveraging the power of technology
The onboarding process is seen as another hurdle in the SME lending process. Engaging with a legacy provider through traditional channels can be a time-consuming experience. Even after that, the bank’s lending criteria may be too high for most small businesses.
“If you are engaging with a new financial service provider, the challenge of being onboarded by them begins with the tiresome paperchase that you may have to repeat a number of times with different lenders before the loan is secured,” says Adrian Cannon, founder of Finch Global, a specialist in the know-your-customer, or KYC, sector.
The power of digital platforms to distribute financial products more widely and at very low cost is key to addressing the needs of the SME sector
However, Cannon says new fintechs such as Omnio are delivering digital engagement platforms that make it easier for their customer’s end-users to source loans from multiple providers through a single digital interface. Similarly, Finch Global is a collaborative initiative that enables lenders to act as their customer’s ‘digital chaperone’. It provides them with a Finch Passport that securely delivers all the data needed to onboard with other regulated service providers.
“The power of digital platforms to distribute financial products more widely and at very low cost is key to addressing the needs of the SME sector,” he says.
New players are keeping the sector alive
Elsewhere, fintech companies are leveraging technologies like artificial intelligence (AI) and automated underwriting to create flexible solutions.
Nucleus Commercial Finance has invested in AI and machine-learning to revolutionise the lending process. “Previously, SMEs would have to wait for weeks, or even months, to receive a decision on their funding request, but thanks to new technology, this decision can now be made in minutes,” says the firm’s chief executive Chirag Shah.
Simon Cureton, chief executive of business finance marketplace Funding Options, is encouraged by new entrants entering the SME finance sector during the pandemic, with compelling digital-first propositions. “It is these kinds of lenders, alongside the incumbent leading altfi [alternative finance] players, that will continue to drive the revolution in SME lending,” he says.
“Going forward we need the fintech sector not to be seen as the cool kid on the block, but properly recognised as playing a critical role in a financial crisis. Reverting to the status quo and leaning on the incumbent banks will ultimately deprive businesses of such choice and competitive pricing. The fintech industry has the capability, ability and resilience to deal with a crisis of this scale, so it’s about making sure innovation is not being stifled and instead encouraged to prosper during turbulent times.”
