The future of SME lending

Things have been tough recently for small businesses. As the pandemic spread around the globe, governments have provided varying degrees of support to small businesses across a huge number of different industries.

In Europe, France took an early lead on handing out state-guaranteed loans, with Switzerland and Germany following suit to quickly distribute emergency funding for SMEs.

In the UK, the business interruption loan scheme (CBILS) was slower to roll out, with many applications declined when they did not meet the criteria required to receive support. One of the main reasons this has been easier in Europe is that the system there is less fragmented than in the UK, with just a few major banks participating in the schemes in each country – the UK launched CBILS with 40 banks on board. Additionally, European countries have more experience when it comes to distributing state-backed cash, and as a result, may have been able to get money flowing far quicker.

As it stands, in the UK SMEs can apply for CBILS through 110 banks and other accredited lending institutions. The types of loans available vary, from fixed-term business loans, to invoice financing, to asset financing. When it comes to smaller loans (less than £50,000), and loans from all but the UK’s 7 largest banks, the Business Banking Resolution Service (BBRS) set to launch in mid-November offers no protection to small businesses wishing to make a complaint and bring a case against the lender.

Banks have also raised concerns about SMEs being unable to repay the loans, resulting in thousands of businesses at risk of closure by spring 2021.

While it may seem grim for SMEs seeking finance, particularly in the UK, we must look to the future to explore how the lending landscape is evolving to provide them with better access to working capital.

Flexibility is key

In these uncertain times, a rigid approach to lending where loans must be paid back in full before a set date is impractical for a huge number of small businesses, particularly those seasonal businesses reliant on peaks and troughs in revenue. Making the same repayments during quieter periods can result in cash flow being severely impacted. Our research showed that one of the top three reasons SMEs would choose a non-bank lender was the ability to make repayments at a time that suited the business.

Fortunately, there are now solutions entering the market which look at card payment transaction value and volume, so repayments can increase when revenue is at its highest, and reduce during quieter periods.

A fairer way to assess eligibility and make faster decisions

Repayment terms aren’t the only part of traditional lending that is inflexible. Lending criteria is strict, looking more at the industry in which a business operates, when assessing risk, rather than taking other factors into consideration.

Another issue businesses face is how quickly funds can be accessed. The typical application processing time for a traditional bank loan is 60 days. Now, online applications can see offers being made almost instantly, with cash arriving in less than 72 hours if successful. In the future, eligibility checks, offers, and funding could be delivered even faster.

Access to affordable, flexible business finance could easily mean the difference between a small business failing or succeeding, expanding, and exceeding its potential – benefiting the global economy as it does so, something that is now more important than ever to ensure a rapid recovery after the impact of COVID-19.

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