SME Lending – Fintech
Across the world, SMEs make up the vast majority of businesses - around 80 to 90%. Historically, to commence operations, obtain funding, survive and grow they have been reliant on non-commercial sources of credit such as family and friends. These sources are limited and it is estimated that more than half of SMEs have no access to credit at all.
The current credit gap, between finance availability and SME needs, is massive and it is expanding because of the traditional banks’ inability or unwillingness to work with SMEs.
When asked the reason for this, Business Finance Professionals cite the following, as some of the reasons SMEs find it difficult to secure lending through banks and established lenders. For banks: -
The cost of providing a $1,000,000 loan and a $10,000 loan are similar. So why spend time on small loans?
Smaller loans have lower margins and generate less profit
SMEs may not have a perfect credit history or score
It is more difficult to verify the SME and evaluate risks
SMEs may not have collateral for security
So where do Business Finance Professionals and their SME clients turn?
Fintech is a holistic term used to describe any business that utilises advancements in technology to remove costs and enhance the delivery of its products or services. When asked about the future, the vast majority of CEOs have stated that their current business models will not survive the digital transformation being experienced worldwide. However, when pressed, this same group of CEOs was uncertain about what this digital disruption will create and what it would look like for their future operations.
The early adopters of using new technologies have been media and music distributors, bookstores and flight and travel companies. Now supermarkets are using tech as a growing part of their sales approach.
In the financial services sector, it is a space that has seen some growth, mainly via a willingness from international investors and market-expanding overseas companies. And Australia is seeing increasing willingness on behalf of clients and Business Finance Professional to embrace this area. However, it appears banks and other financial institutions have been holding back.
A comparison to the United States shows an increasing demand for fintech, with fintech lending companies now a major provider of SME funding. The flow-on effect has seen the US banking sector review their style and become open to alternative lending using fintech collaboration. The emerging benefits of this are solutions that combine traditional banking strengths with the innovations heralded through fintech.
Fintech itself is, therefore, developing in two distinct directions. Financial Fintech dealing directly with clients and Technical Fintech which focuses on providing back-office, specialised services to other businesses, such as banks. Not surprisingly, Technical Fintech has been extremely profitable as banks and other large US institutions throw money at chasing solutions.
Australian Fintech Lending
In this digital transformation environment, a new breed of lenders has emerged as an alternative to the banks. These Fintech lenders have armed themselves with highly-automated application and decision-making processes, that offers a more efficient and seamless SME client experience.
That’s not to say that Fintech lenders are altruistic – they’re not here to save the day at their own expense. The way they have started to take market share away from the banks is by using technology to make better and faster lending decisions. Their systems allow them to check an applicant’s borrowing history and predict the risks associated with funding within minutes, saving them time and money. They use open banking, automate as much as possible and are even beginning to introduce Artificial Intelligence (AI). As well as speeding up the process, these systems help avoid paperwork and bureaucracy and can ultimately reduce the interest rates SMEs pay on their loans.
During this period, the banks foray into fintech lending seems to have been limited to dabbling with stand-alone features for mobile apps and providing customers with access to online comparison charts. Some banks are further advanced and are starting to make progress, recognising that changes need to be made. They are introducing more and more digital products to their list of offerings and addressing data analysis, internal processes, client-facing tools and frontline staff skill sets.
Many, however, are painfully slow to embrace new technologies, cautioning the risk and security concerns of moving into this area. The more established financial institutions face a complicated and expensive process to reform long-standing workflows and introduce new platforms and systems needed to make a meaningful move to the digital age. And, as strange as it sounds, some banks are restrained by their management teams who are not tech-savvy and are unwilling to embrace the new world.
Wherever it comes from, Business Finance Professionals are privy to a new suite of fintech solutions, that differentiate lenders and provide benefits to their SME clients. These include: -
Lending Modelling Software
Data Analysis Systems and access to Open Banking
Online Loan Application and Processing
Customised Financial Dashboards
Financial Management Software
Client Data Management Solutions
Integration with Accounting Software
Based on these, recent years have seen the rapid rise of the Fintech lenders, both in terms of numbers and variations on products, services and technology platforms. For SMEs and Business Finance Professionals, this means more due diligence and comparisons are required to ensure informed decisions are made and solutions that best suit the SME circumstances are found.
Business Finance Professionals know that every SME they work with is different, and that they are uniquely positioned to align the new proliferation of fintech products and services the lenders are developing, to the needs of their SMEs.
Despite competition starting to introduce some high-level functionality in fintech products, it is the basic features that are most appealing to SMEs. When surveyed the things they want are: -
Time is money, especially for SMEs, and when they don’t have to trek to the bank to fill out a mountain of forms this is very appealing. An online process that can verify their credentials using cash flow, historical data or even psychometric assessment, can save valuable time, energy and effort. And linking the process to the SME accounting and/or business banking software allows ‘the machines’ to do all the grunt work, freeing up the SME to work on their business.
Fintech lending software development merges financial know-how with the newest technology to enhance SME lending, resulting in decision turn-around time that is fast and efficient. The SME can get an answer to their application almost instantly, meaning they are not waiting and constrained in making the strategic or operational changes the funding will provide. Sometimes these SME level changes are time-critical and accessing a loan can be the difference between competitive advantage or missing an opportunity. It is also stressful putting your fate in the hands of someone else and then having to wait, not knowing the outcome. The sooner the SME and Business Finance Professional know, the sooner they can move forward or try alternative avenues.
No Collateral Alternatives
Traditional business lending has relied on collateral as the basis for securing a loan which has severely limited the lending options for SMEs, especially start-ups. Again, fintech has opened up information flows that allow lenders to look past a lack of physical collateral to analyse the creditworthiness of SME loan applications.
From these bases, Business Finance Professionals can build in additional functionality that suits a particular SME.
Alternative Lending Products
At this stage, fintech lenders are competing with the banks and traditional lenders by providing the following products.
Whilst similar to a traditional mortgage, these loans use digitalised lending systems to assess and provide a loan backed by SME collateral. Due to the simplified process, all other things being equal, the SME can get the loan at a lower cost and with more attractive eligibility criteria.
Alternative SME Loans
Noting the rate of declines the banks have imposed on SME loans, usually due to the lack or non-existence of collateral, alternative lenders have developed new approaches to securing the loans. Examples of this are cash flow and invoice financing.
Peer-to-Peer lending is digital and online and matches borrowers and lenders who can negotiate suitable terms and rates. Providers have established platforms that use metrics like credit scores or social media activity to provide this alternative market. Since the platforms don’t own the loans, the platform costs are very low. This is an increasingly popular form of alternative lending.
Unlike banks, who deal in a variety of financial services, fintech lenders are providing a dedicated finance solution for SMEs. Their focus on technology, efficient credit profiling, faster loan approvals and alternative approaches is becoming a viable and attractive way for SMEs to get funding outside the traditional channels.
In conjunction with industry experts, elevateB has developed a self-paced, online, interactive Business Finance Certification. This program will provide you with the knowledge and skills required to become a successful Business Finance Professional and work in the SME space. In addition, it provides strategies and soft skills to assist you to better market and deliver your existing and new-found client offerings.
For more information on the Business Finance Certification, click here.