Clouds (4)

Small businesses are the linchpin of the UK economy. Yet it can be a struggle for some to secure funding from traditional lenders. To assess the level of risk they carry can be difficult, loan amounts tend to be smaller making them a less attractive proposition, and many lack a credit history.

It’s a problem not only for the small and medium enterprises (SMEs) involved but for the economy as a whole. Government statistics show that SMEs account for 99.9 per cent of UK private sector companies, have a combined annual turnover of £1.8 trillion – nearly half (47%) of all private sector turnover in the UK - and provide 60% of private sector employment. Hinder small businesses, and economic growth overall suffers.

Yet, the Department for Business Innovation & Skills has put the rejection rate for first time SME borrowers at around 50%. The small business owner faced with these odds can be disillusioned by the time and effort they need to invest in pulling together a credit or loan application. Such a task is an unwelcome distraction from their core business.

For lenders, SME rejections could add up to opportunities missed. Small businesses, after all, can become big businesses.

Lenders could be funding the next big venture. Their new SME client may be starting small but the banking relationship could grow and develop into something long-term and lucrative.

In the short-term however, the effort to risk-assess a prospective SME customer may outweigh the reward. Strict internal safeguards, external regulatory mandates and slow, often manual processes can make the going tough for lender and borrower alike.

Game changer

The World Economic Forum’s Global Agenda Council suggests that financial technology (fintech) could bridge the financing gap for SMEs. In its white paper it states that fintech, ‘has the potential to become a game changer in the funding of small businesses.’

Cloud-based services can hold the key. They can free up financial institutions from having to build and maintain everything themselves. Sourced from specialised solutions providers, cloud-based solutions can support not only the processes that underpin credit and lending, but also the entire credit lifecycle.

Five compelling reasons for cloud-based risk analytics and decisioning solutions are:

  1. Investment – cloud-based solutions remove the need for a significant capital investment in hardware/infrastructure to get up and running
  2. Customer focus - resource within the company is freed up to focus on customers rather than IT, which is not the core business
  3. Innovation – through specialised services from niche providers who innovate for the cloud companies can stay relevant with new, improved services
  4. Scalability – with a reduced need to maintain and support a complex IT infrastructure, scaling up and down as needed becomes simpler. Finance providers can increase capacity at times of high demand and scale back down at low demand instead of having to maintain hardware that is regularly under-utilised
  5. Analytics – the processing capability to make use of big data can reside in the cloud. Tapping into the wealth of information from the data held on customers, products and repayment models can provide a granular level of detail previously unattainable.
New market entrants have been able to exploit fintech to the maximum. In contrast to established financial institutions they are unencumbered by legacy infrastructure and the ongoing need to support a wide ranging product set and customer base. They’ve already created alternative, viable options for SME financing that include peer to peer lending.

Through financial technology, traditional lenders can similarly deliver solutions that enable them to compete in their established markets, as well as helping to improve their own processes. They can look to the latest technology for solutions specific to the particular business and customer needs they need to meet.

By Paul Thomas, Managing Director of risk analytics and decisioning solutions provider Provenir