By Mikkel Velin, co-CEO, YouLend
The UK government’s Help to Grow Scheme is the latest chapter in a familiar story for small- and medium-sized enterprises (SMEs) across the country. For years, vital funding has been unfairly inaccessible, for arbitrary reasons – such as if a business has only been trading for a certain amount of time, or total revenue falls below a certain limit.
And since the pandemic, SMEs’ need for funding has been more acute than ever. So why are lenders still only considering outdated and incomplete indicators to assess SMEs’ eligibility for funding – when they are such a crucial part of the country’s economy?
Even once we understand why this is happening, that alone isn’t enough. The real question is@ what do lenders need to do to facilitate change?
A lack of financial inclusion
To qualify for the UK government’s Help to Grow scheme, businesses must have at least five employees and must have been trading for at least 12 months. This excludes hundreds of thousands of SMEs, highlighting – once again – that there is a deep misunderstanding of what data is actually useful and effective when determining which SMEs qualify for support.
And it’s not a problem limited to government funding: it is one that is played out time and time again across traditional lenders.
These small businesses are often locally run, supporting their owners’ families and allowing them to lift themselves into a higher income bracket – further fuelling the economy. So why are government programmes still preventing solutions to these solvable problems, by continuing to refuse to implement the technology that will enable financial inclusion?
Times are changing
Ultimately, this is a result of an outdated understanding among traditional providers around what data is actually useful and effective when vetting SMEs.
Today, SMEs are more varied than ever. More and more entrepreneurs and taking the plunge – with up to 600,000 start-ups in the UK today, compared to as few as 100,000 in the late 1990s.
You only need to look at the digital world of commerce, where employee count does not reflect the true value that a business adds to the economy. An online shop may be run by one person – but can still bring in more revenue than a 10-person brick-and-mortar business, as well as creating more value for other businesses down the value chain, such as suppliers, service providers, or customers.
Our research indicates that 16% of businesses are side hustles, which are typically run by one person. Such businesses are very unlikely to be eligible for funding and support within current, or traditional, qualifiers. And yet, they enable their owners to supplement their income and have potential to become significant contributors to the economy.
Looking ahead
All of this means that a more sophisticated and nuanced approach to assessing SMEs’ eligibility for support is needed.
Currently, traditional lenders are only looking at part of the picture: namely size, credit-payment behaviours and time in business.
While they are certainly useful indicators, enhanced information that identifies non-credit payment behaviours and metrics that track perception of the SMEs amongst their customer bases must also be considered when it comes to determining future success and risk levels.
In order to get a full picture of the health and future growth trajectory of a business, lenders today must incorporate analysis of digital marketing and commerce metrics, such as website users, dwell time and repeat website visits – all of which provides unique insight of customer loyalty to merchants.
But there’s another concern: as the pool of data becomes more sophisticated and nuanced than ever before, it is also increasingly subject to convolution. As well as incorporating more data points, then, lenders must be willing to invest in more sophisticated technology and analysis to use it.
Data received from merchants is often subjective and vulnerable to manipulation. By taking data directly from the merchants’ website or platform, lenders have the benefit of higher objectivity and transparency in the data they are using – as well as ensuring that is updated in real-time.
To really support SMEs effectively, a full overhaul of how SMEs’ eligibility for financial support is assessed must occur.
A symbiotic relationship
This is possible today – and, for both the government and for banks, is a mutually beneficial move.
For the government, supporting this crucial market will provide a much-needed boost to the economy.
And for banks, providing better support for SMEs could be crucial in them maintaining this sector of the economy as a client base. The proliferation of e-commerce platforms and payment service providers mean that SMEs have more options when it comes to lending solutions. If banks don’t want to lose out on this market share, they have to leverage cutting-edge technology and analytics in order to match the fair, convenient, personalised and affordable lending solutions that SMEs can increasingly find elsewhere.
These banks must start paying attention and making themselves familiar with the latest in lending technology – not only for SMEs’ sake, but for their own sake, too.
