There has never been an ‘easy’ time to run a small business. From struggling to carve out a niche in the market to maintaining a solid pricing strategy and ensuring exceptional customer service, it is no surprise that only 50% of small-medium enterprises (SMEs) survive past the five-year mark. However, the arduous conditions brought about by the COVID-19 pandemic have only served to accentuate one struggle in particular: securing adequate funds to stay afloat.
As world economies seek to recover from a year’s worth of stagnation, bolstering SMEs’ success will be an important factor in their restabilization. Yet, with 80% of their loan applications rejected by high street banks, can it be said that SMEs’ needs are being adequately met? As well as addressing the cultural shortcomings that allow this problem to persist, finding an answer to this question requires careful consideration of what alternative lenders and fintechs are doing to plug the gaps.
To gain a frontline perspective on this issue, we spoke with Colin Goldstein (CG), Commercial Growth Director at iwoca, one of Europe’s leading alternative business financiers. His comments steer the conversation and are then supplemented with further analysis.
Q. What is the appetite for small business lending among banks? Are small businesses being pushed to explore alternative lending propositions?
CG: Recent research from Marqueta suggests that small businesses are losing confidence in the big banks, with 84% of UK SMEs frustrated with their current banking experience and 67% prepared to find a new provider if their current bank is unable to provide better digital capabilities.
Elsewhere, there are stories of high street banks declining small business owners despite their eligibility for funding. A substantial flow of customers come to iwoca, having been rejected by big banks. Katrin Herrling – CEO of one of our most trusted introducers, Funding Xchange – gave her insight on this recently: “...banks built their credit models in the 1970s when the typical company was eight years old and had a pretty steady trading record [...], but that is not the profile of the typical company that makes today's economy.”
Yet this isn’t to say that high street banks have lost their relevance entirely; on the contrary, their superior lending power makes them an invaluable asset in the lending space, if only the availability of funds could be broadened for SMEs. Venkatesh Varadarajan, Partner in Financial Services at Infosys Consulting, is confident that, by 2030, enhanced data sharing capabilities might harmonise the divide between banks and alternative lenders. “Banks will be actively pulling in data from customers’ other bank accounts and profiles, collaborating on products and services, and working in tandem to give consumers the full visibility they demand. This will allow them to slice and dice the benefits of each bank as they please, in line with their individual lifestyles.”
Fulfilling this vision across the board will be important; Herrling also notes the worrying statistic that 35 to 40% of businesses are currently at risk of falling outside what banks consider ‘fundable’ because of outdated standards. Clearly, what’s needed is a new paradigm for SME loan processing that takes modern capabilities into account.
Q. Is there a robust system in place for measuring small business risk? How can data be managed more effectively?
CG: It’s incredibly difficult to assess the credit risk of small businesses, which is why at iwoca, we’ve developed a leading proprietary risk model using technology and data to assess credit risk accurately and at record speed.
Built to allow streamlined end-to-end processing and risk analysis specific to the micro and small business segment, our platform can assess businesses based on real-time performance data obtained from tech integrations with third parties. This allows us to go well beyond conventional credit scoring. Our ability to blend human expertise with machine learning allows iwoca to efficiently analyse and assess the financial health of SMEs.
iwoca isn’t alone in seeking out new alternatives to cumbersome and legacy tech-inflected loan applications. In the US, Lendio created an online process backed up by a proprietary algorithm, which matches applicants with appropriate loan options via a network of high-profile finance leaders like AmEx, PayPal and Kabbage. The company claims that online applications can be completed in as little as 15 minutes, a substantially expedited process compared to banks’, which can take days.
Elsewhere, Atom Bank and Plaid have partnered to streamline the former’s Coronavirus Business Interruption Loan Scheme (CBILS). “When Open Banking first took shape, SMEs were largely ignored. Now three years in, we’re finally seeing innovative services emerge, like Atom’s, that solve their unique financial needs, and in an economic climate where they face bigger obstacles than ever before,” stated Keith Grose, Head of International at Plaid.
Open Finance, says Goldstein, is also an important focus for iwoca:
CG: Around half of our SME customers use [Open Banking] to link their bank accounts. This means we can provide continuous underwriting on data feeds they have. As we navigate through the crisis, we’re constantly updating our risk models and underwriting to understand the underlying risk in the SME segment.
How to use Open Data to move beyond banking
“There is clear evidence to suggest SMEs want their banks to be more holistic advisors. Research from Accenture found that 31% of SMEs are looking for close engagement from banks, seeking help to optimise their business.
“By embracing Open Data, banks can bring in data from other industries to provide new products and services for their customers, from recommending better utility providers to reduce costs, or linking with accounting software providers to develop additional services with broader data sets. This enables banks to take a more holistic view of their customers’ financial welfare and position themselves as a trusted advisor and guardian of data.”
Q. What do you think will be the trajectory of SMEs’ recovery, and what challenges or opportunities exist for fintech lenders?
CG: Different sectors will experience different paces of recovery, but many small business owners have built up resilience throughout the pandemic. Access to finance will be key for their recovery. When iwoca conducted a survey of accountants in March 2021, they advised that the top priority for businesses should be to ensure they’re well funded (49%).
Embedded finance is a huge opportunity ahead. Small businesses need to be able to access finance when and where they need it. Services they can use day-to-day like bookkeeping apps, payment processors or invoice management systems accommodate this requirement. The ability for the industry to offer this flexibility to their customers will create a powerful support tool for small businesses, enabling them to stay agile and get what they need quickly as they recover from the pandemic.
Like other aspects of finance, it seems that the future of small business lending will be centred on digital technology that can provide a more personalised experience to customers. Fundamentally, banks must try to close this culture gap if they wish to compete with the fintechs that embrace alternative approaches to lending. Indeed, with SMEs burdened by heavy amounts of debt from the pandemic, doing so could be essential to global economies’ broader recovery plans.
Cover image courtesy of Valeria Simantob
Meet our quote maker...
Colin Goldstein, Commercial Growth Director, iwoca
iwoca is one of Europe’s leading small business lenders, providing an alternative to traditional business finance. It was recently named as the top small business lender and highest-ranking fintech firm in The Sunday Times HSBC International Track 200.
Throughout the pandemic, iwoca has lent over £300m through the government-backed Coronavirus Business Interruption Loan Scheme (CBILS).
Goldstein is responsible for growing the company’s loan book through partnerships and overseeing its collaborations with the likes of Xero, Tide, Funding Options and Funding Xchange.