SME lenders breathing life into UK business

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.

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.”