"It is paramount that funding is made more accessible and that brokers are able to source fast lending avenues for their clients."
Smaller businesses, restricted by tighter finances and cash reserves, are likely to face the biggest challenges. Almost eight in ten (78%) small businesses consider the growing cost of living to be the largest threat to their operations over the coming year, according to recent PayPal research. Due to the difficulty of longer-term financial planning and growth, the main priority for many SMEs is to prevent themselves from going under.
Soaring inflation, which presently sits at 9.9% in the UK, is one of the most significant issues businesses are currently facing. Inflation has increased prices overall and is predicted to become worse before getting better. The impact this has had on businesses includes rising rent, bills, and the cost of commodities, problems with the supply chain, and higher wages to support their workforce. At the same time, inflation is reducing the spending power of their customers. It is a double-edged sword.
To cope with these financial challenges, many businesses have had to increase the costs of their own products and services, which has, in turn, further impacted customer demand. While we certainly should not undervalue the tenacity and entrepreneurship that SMEs across the UK have displayed in recent years, it is clear that financial support is needed. That does not mean handouts, per se, but rather better access to capital, be it for growth or survival.
Since SMEs account for 60% of UK GDP and the majority of new job creation, it is paramount that funding is made more accessible and that brokers are able to source fast lending avenues for their clients.
Increasing need for finance
To navigate the testing waters they find themselves in, many SMEs will require access to additional finance. An injection of capital could be used to improve operations, such as digitalising products and processes; reskilling and upskilling their workforce; or simply boosting cashflow to remain competitive through the tumult of price changes.
Furthermore, less often cited is the human collateral of businesses falling into financial distress. According to a recent Three report, 39% of small business decision-makers stated that financial pressures are contributing to a decline in their mental health, while 22% say mental health exhaustion could be their biggest challenge this year.
Business leaders’ anxieties will be fuelled, in part at least, by not knowing where to turn for much-needed finance. SME loans are, after all, notoriously tricky to secure. As such, it is important decision makers and brokers understand the options available to themselves or their clients.
Financing options for SMEs
The traditional sources of credit, banks and credit unions, remain the most common form of lending for small businesses.
EY found that 63% of SMEs still prefer traditional banks for their financial needs. However, traditional lenders tend to be more selective in who they lend to. This has contributed to an SME financing issue as smaller businesses are perceived to be high risk – a concern accentuated by the cost-of-living crisis.
A cautious approach to lending is just one of the reasons smaller businesses are looking elsewhere for finance. Legacy financing processes are often accompanied by delayed and impersonal legacy services, as many banks have failed to truly embrace the full potential of tech-based digital lending. Delayed access to finance is not an option for businesses that, in the current financial climate, need immediate help.
Consequently, this space is being filled by fintechs, which have been able to use innovative digital technologies to simplify the sector through the creation of frictionless alternative pathways to finance. Thanks to the rise of new digital lenders, brokers now have more choice when weighing up options for their SME clients.
Businesses are now opting to accelerate their growth with the help of digitally-led financial options that provide quicker, simpler access to capital as well as more effective and transparent risk and credit management procedures.
New, innovative fintech allows the analysis of far greater amounts of data than traditional methods, allowing lenders to consider a broader range of factors, from a variety of data sources, in considering the borrower’s application. The use of intelligent APIs, Open Banking, and cloud-based technologies can more easily provide much-needed finance to small businesses by seamlessly transmitting, digesting, and analysing data for frictionless lending.
Meanwhile, newer technologies such as artificial intelligence, big-data analytics, and machine learning are used to understand and predict the behaviour of small businesses to assess the lending opportunity in line with risk parameters. This also enables lenders to consider more non-traditional data than legacy lenders can, opening up borrowing to small businesses that may have been rejected by the big banks.
For small business owners, these are stressful times, and it is becoming more challenging to make long-term business strategies, given the state of the economy is unlikely to improve rapidly. However, the growth of fintech in the SME lending sector is a game changer in improving businesses’ access to finance.
Digital lenders can use the current climate as a chance to highlight the value and significance of cutting-edge, disruptive financial tech solutions. By doing so, we can make it quicker, simpler, and more equitable for deserving SMEs to access the cash they require to survive and grow.
