Financial inclusion, or rather, exclusion, has long been a hot topic in personal finance circles. Ensuring individuals have fair and affordable access to financial products to suit their requirements is vital for improving equality and overall well-being. However, financial exclusion is increasingly becoming a concern for businesses. Post-recession business lending is a challenging and competitive market, with SMEs often facing the toughest battle for finance. With banks closing branches across the country, businesses have less access to financial experts and this is having an impact on their ability to borrow.
When we spoke to over 500 heads of finance for SMEs earlier this year, we found that almost all (92.5%) have needed to access finance within the past five years, and just 13.5% found it was plain sailing.
Without additional funding, 24.6% of the SMEs we surveyed would have to let employees go, 13.3% believe the business would ultimately fail as a result. 60% of the UK workforce is employed by SMEs, that is 16.1 million people at risk of unemployment if their employer struggles or becomes one of the 90% of start-ups that don’t make it to their fourth anniversary.
SMEs face a lengthy list of challenges when looking to borrow from traditional banks. For those SMEs we interviewed, the biggest issues were rates, fees and speed. 35% said their bank didn’t offer the best rate; 28% found the fees too high; and for 23.4% and 21.4%, respectively, the speed of facilitation of the finance and even speed of response from the bank were a problem.
18.8% found that their bank didn’t offer the length of loan they wanted, demonstrating the inflexibility of traditional banking systems. Each of these specific issues can exclude a company from fair and affordable access to the finance required for business prosperity or expansion.
It is interesting to see that the smallest of SMEs were the group which found it most straightforward to obtain a bank loan. 38.6% of larger SMEs, with 100-249 employees, compared with 32.1% of microbusinesses of up to nine employees, struggled to get the best rate from their bank. Fees were too hefty for 22.6% of microbusiness but 31.6% of the largest SMEs. Speed followed the same pattern: banks could not facilitate the finance quickly enough for 14.2% of microbusinesses, and 30% of large SMEs.
The new lending landscape
Facing such significant barriers to borrowing, small businesses are at real risk of failure, due to financial exclusion. Big banks remain the largest business lending providers, yet they cannot meet the changing needs of businesses today. Their inflexibility due to legacy infrastructure holds them back from offering the flexibility SMEs need – not to mention the rapid arrangement of funds a fast-based business requires in order to remain competitive.
However, new providers are stepping in to bridge the gap between what banks can do and what businesses need from their bank. Financial utilities such as Banking Circle are exclusively able to provide banks and Financial Tech businesses with the ability to provide their business customers with better borrowing solutions.
Working together with third parties, in an ecosystem model, allows financial institutions to deliver transparent, easy-to-manage, flexible and low-cost lending solutions. For the first time, this can be done without the significant investment in time and personnel that it would require for the banks to develop and deliver these solutions in-house.
The agility of alternative providers, such as financial utilities, means they can build and deploy the most efficient and cost-effective solutions far more quickly than a larger, more traditional provider is able. As such, they are more capable of meeting the ever-changing needs of SMEs in today’s market, which allows them to stay far ahead of the competition.
With lenders able to provide better and more accessible solutions, they are improving financial inclusion and therefore the long-term prospects for SMEs of all sizes. In today’s highly competitive and rapidly changing global marketplace, businesses must continually innovate and expand in order to remain competitive and successful.
To succeed, therefore, most SMEs will need a cash injection at some point, especially in their early business lives. Without this, consequences can be dire, and that figure of 90% of start-ups failing within the first four years hangs heavy on the shoulders and in the minds of SME owners.
Access to extra cash could mean the difference between selling goods at full price or cutting prices – and, consequently, profits. Or it could mean the difference between increasing headcount or letting loyal staff go. But access to affordable, flexible business finance could easily mean the difference between a business failing, and a business succeeding, expanding, meeting and beating its potential and benefiting the global economy while it does so.
The importance of financial inclusion, and the size of financial exclusion as a global problem cannot and must not be underestimated. The banking and payments industry must work together to improve the prospects of SMEs.
The full results of the SME study are included in the white paper, The epic business loan battle: SMEs fighting for finance, which can be downloaded here.
[i] Source: Business Population Estimates for The UK and Regions 2017, November 2017