By Paul Thomas, Provenir
The importance of small and medium sized enterprises (SMEs) to the UK economy can’t be overstated. Accounting as they do for 99.9 per cent of private sector companies, they have a combined annual turnover of £1.6 trillion and provide 60 per cent of private sector jobs in the UK.
To build and grow their businesses SMEs need access to affordable capital financing. Many apply to banks for a business loan. However those loans have been harder to come by since the financial crisis and larger companies, being lower risk, have generally been more successful than their smaller counterparts.
The process of securing a bank loan can be a daunting prospect for funds-seeking smaller businesses. In the US, CEB analysis of US Federal Reserve statistics revealed that less than a fifth of small business loan applications are approved and applicants spend more than three working days pulling together the documentation they need to apply.
It’s not a great prospect for the time-poor small business owner. Facing three days on an application that has only a 20 per cent chance of success. Their time is precious and they wish to spend it focusing on building up their core business and competing for sales to increase revenue.
It’s also an unwelcome distraction waiting to hear if the application has been successful. Innovation may stall while an answer is sought. It can take weeks for some applications to work through the system - small businesses often have a less comprehensive credit history than larger, established businesses. Applicants may get an inconclusive outcome and be asked to submit further information. They could potentially go around the loop a few times before they find out if the loan will be forthcoming.
It’s stifling to small business growth, progress and innovation. Some small businesses are starting to look at other options and into the void have stepped alternative lenders. These include peer-to-peer lenders looking to offer convenience and speed.
Where loans are higher risk they may attract a higher premium but for many SMEs alternative funding options are becoming a viable alternative. New figures from the Peer-to-peer Finance Association reveal over £500 million of new loans were made to consumers and small businesses since April 2015, the highest growth rate yet.
It’s the start of a success story that’s also being told in the US. There, a CEB survey of small business owners found a quarter had used alternative lenders and 62 per cent of respondents preferring them cited ease of set-up and use. CEB suggests a convenient application process forms the basis of many non-bank lenders’ customer acquisition strategy. Recognising that borrowers may pay a potential premium for the service, the survey found that of the small businesses favouring banks 29 per cent called out prices.
Unencumbered as they are with legacy infrastructure, alternative lenders have built their business models around simple, accessible application processes with a rapid turnaround. However, it’s not just about a user-friendly website and a simple online form. For traditional lenders still aiming to target the small business segment the front-end is just the surface. They need their back-office processes and systems that manage the loan application process to be efficient and as automated as possible. Inflexible, manual processes result in lengthy lending decisioning. Which is bad news for the small business waiting on funds and also on the traditional lender tying up resources in loan assessment.
To speed up and simplify the loan origination process will take a migration away from manual processes to digital ones and the embracing of automation. Where this is done with due regard to comprehensive risk assessment, borrowers and lenders alike stand to benefit from a higher rate of loan approvals.