By FintechOS · July 25, 2022
5 minute read

SME financing gap: fintech can fix the fissure

SME financing gap: fintech can fix the fissure

As a lender, what can you do to help fix the SME financing gap? SMEs are crying out for funding solutions, and fintech is the answer.

For any financial institutions that loan money to small- and medium-sized enterprises (SMEs), the message is loud and clear. SMEs can’t get sufficient funds quickly enough to stay in business, so lenders are losing customers.

This is not only bad news for lenders, it’s bad news for the wider economy too. The UK Federation of Small Businesses (FSB) has warned that ‘pulling up the drawbridge’ to UK SMEs will further stifle economic growth. FSB research shows successful finance applications plummeting to the lowest level on record.

The FSB’s is Small Business Index (SBI), a quarterly poll to measure the confidence of approximately 1,200 enterprises with less than 500 employees in the UK. The latest poll shows that both applications for small business loans are down and approvals are at an all-time low.

Furthermore, the latest figures from the Bank of England, published in May 2022, show the annual growth rate of borrowing by SMEs. It fell to -5.3%, the lowest since April 2012 (while large business borrowing grew to its highest rate since June 2020). Neither paints a particularly inspiring picture for SMEs.

A bleak outlook through the SME financing gap

The SBI poll also reveals the SME financing gap is seeing SMEs report significant problems with late payment and supply chain issues. 11% of small firms, or over half-a-million businesses, plan to close, sell or downsize over the next year.

There is huge potential for lenders to increase their customer base by exploiting fintech solutions. As the SBI figures also show:

  • only 9% of small firms applied for finance in Q1 2022 (the lowest proportion since records began)
  • a record low of 43% saw their applications approved
  • a meager 19% described the availability of credit as ‘good’, the lowest percentage since 2016.

Worryingly, of the finance that is lent, much of it is being used to manage cash flow problems. This cash could be spent on much-needed investment and innovation in technology and staffing.

Cash flow issues appear to be fuelled by a growing amount of late payments sweeping through the economy. Nearly two-thirds of SMEs said they were impacted by late payment of invoices over the first quarter of 2022. 22% said the likelihood of late payment is growing.

Investment and innovation being stifled

It’s a critical time for SMEs trying to rebuild after the pandemic and in the face of rising business costs. Research by Novuna Business Finance shows the need to close the SME finance gap has increased on last year. 70% of SMEs, however, said they will have to put growth plans on hold unless they can access funds.

In a report from the fintech smart payments platform, Yolt, a third of SMEs who tried to access finance were rejected last year. They estimate that they lost a total of GBP 3.7 billion in potential funding over the course of 2021.

Reasons for rejection included the age of their business, the level of existing business debt, and the lack of sufficient collateral. Of those that were successful, only 20% of SME owners described the process of borrowing as easy. Less than 10% thought the process made effective use of technology.

Bridging the SME financing gap with fintech

Clear evidence shows SME growth is held back by a lack of awareness of funding options. Research carried out by Asset manager Boost&Co in its survey of 500 UK business leaders for its 2022 ‘Geared for Growth’ report found that nearly a fifth of business leaders are unaware of the finance options available. The way forward is for financial institutions to use fintech loan application software to speed up time-to-cash for their suppliers and close the SME financing gap.

The most-popular options for finance, as unveiled in a survey of 500 UK SME owners for Bibby Financial Services, are currently:

  • business loans (34%)
  • credit cards (30%)
  • overdrafts (29%)
  • government loans (21%)
  • invoice finance (19%)
  • private equity (14%)
  • asset finance (13%)
  • crowdfunding (12%)

Shaking hands over the SME financing gap

For the economy to grow its way out of the pandemic, it’s essential for funding to be seen as a partnership. Culture change is what’s needed here. [We need] lenders taking an objective approach to small business finance and big corporates putting best supply chain practice at the heart of environmental, social and governance programmes. The result would be win-win: strength in corporate supply chains and a thriving small business community driving economic growth from the ground up.

Martin McTague, the FSB national chair

This is where FintechOS’s Lighthouse platform comes in. A retail and commercial banking platform powered by high-productivity fintech infrastructure (HPFI), it allows financial institutions to easily create hyper-personalized experiences. This is exactly the sort of service SME owners appreciate.

As the FSB figures show, the SME financing gap is a real issue. Yet, by their very nature, SMEs are not at the size that requires full-blown commercial lending products. Neither can they simply use retail banking products.

SMEs are falling through the cracks and are a vast, largely untapped market for financial institutions willing to offer more specialized services. Lighthouse allows and encourages:

  • smarter market segmentation
  • better risk assessment
  • the hyper-personalized banking services that SMEs ask for

Collectively, this all provides a better understanding of SMEs’ needs and can be carried out quickly and seamlessly. Innovate and implement some smart fintech solutions, and it’ll go a long way to bridging the financing gap that many SMEs face.

To discover how our platform can help you bridge the SME financing gap, book a demo.

Share this article with your connections