How technology can support SME lending during the pandemic How technology can support SME lending during the pandemic
COVID-19 has resulted in a host of new challenges for the UK’s small businesses. Arguably, one of the most pressing being how to access funds to remain afloat. This is especially important as it has been recently reported that a fifth of all UK SMEs could run out of cash during the ongoing crisis if not supported correctly.
However, access to cash is not a new problem for businesses. Prior to the current pandemic research has shown that two thirds of businesses actually required extra finance over the past 12 to 24 months.
Although banks are doing all they can to help businesses through the pandemic, and the government has rolled out the bounce back loan scheme, standard lending solutions and practices are still generally not geared towards SMEs. Looking to the future, it’s vital therefore that the industry evolves its practices, making financial inclusion and lending a priority to ensure UK SMEs’ survival.
Existing issues
Aside from the Coronavirus Business Interruption Scheme Loans, for UK SMEs looking to take out a loan one of the primary issues facing them is the time it takes to become verified and accepted. The general industry average for clearing a loan is 60 days, and this is a pre-COVID-19 figure, meaning applications today are likely to be higher (and verification timings longer) than this.
The primary issue is that many traditional banks simply lack the underlying technology infrastructure required to increase the number of applicants they can process, or the speed in which this can be done. This means that even if they wanted to ramp up their SME loan support, they are unable to do so.
Flexible technology results in faster funding
To solve these challenges, a shift in focus for banks and payments providers towards a more customer-first approach is key. This requires legacy IT infrastructure to be updated or replaced with more modern, flexible alternatives that are better suited to meet the needs of the SME.
However, with Euromoney estimating that the total cost of maintaining legacy systems, investing in new systems and paying IT staff amounts to anywhere from 15% to 25% of a typical bank’s annual budget, this is not something many financial institutions can afford – especially in the current environment. As a reaction, we are seeing an increased shift towards a financial utility model, where financial infrastructure providers are supporting banks and payments companies so that they can focus on better serving their end customers.
Importantly, this enables financial institutions to come up with the necessary innovative solutions for SMEs, knowing they now have the underlying infrastructure to execute it. This can include lending propositions that are built and designed with the flexible requirements of the modern-day small business in mind; enabling the ability to calculate loan requirements, receive confirmed offers (and then funds) in just a matter of hours.
This flexibility, such as being able to repay money based on cashflow, is extremely important for SMEs. Especially at a time where their income is likely to be significantly lower than normal.
Remaining compliant
In addition to these benefits, aligning with a financial infrastructure provider can help maintain regulatory compliance. Balancing compliance with regulation is a continuous challenge for banks and payments providers in particular, and as more regulations arise cross-country, it has become a real test for anyone operating in the market to remain fully compliant.
Fortunately, through working with a financial utility partner, the CTOs and compliance officers of payment companies and banks can sleep soundly knowing that the right due diligence has been carried out and maintained. Important elements to look out for when selecting the right infrastructure partner should include ongoing due diligence, transactions monitoring, sanctions screening and event-driven reviews.
A path towards greater financial inclusion
SMEs have historically found it harder to become as financially included as their larger peers. The current environment, however, provides a great opportunity for the payments and banking industry to take stock, re-think and ease this difficulty.
Most recent figures show that there are 5.9 million SMEs in the UK, and losing even just a small proportion of these over the next few months or years could significantly hinder the wider economy. It is therefore in everyone’s interest that the financial infrastructure is in place to ensure that a business, no matter the size, has the ability to apply for, and access funds to keep its operations going. This should not just apply to the current COVID-19 environment, but become standard industry practice.
COVID-19 has resulted in a host of new challenges for the UK’s small businesses. Arguably, one of the most pressing being how to access funds to remain afloat. This is especially important as it has been recently reported that a fifth of all UK SMEs could run out of cash…
