Overcoming obstacles to SME lending

Joe Bowerbank – Business/Commercial Development, Creditinfo Group.

 

It’s no secret that small and medium-sized enterprises (SMEs) play a significant role in the growth and development of economies around the world, as they help to create jobs and alleviate poverty. They play an especially important role in developing countries. With SMEs representing around 90% of businesses and more than 50% of employment, their importance to the health of our economies and societies cannot be downplayed.

Over the last twenty years, the SME sector has experienced steady growth. However, despite its steady growth, contributions to the economy and local job generation, the sector still faces significant challenges when trying to access finance and maintain a steady cashflow.

When it comes to applying for loans to help grow and develop their business, it can be extremely challenging for SMEs to borrow money from traditional banks because of strict requirements. It is estimated that 65 million firms, or 40% of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year. As a result, many SMEs have to rely on friends and family for financial help.

So, why is it so difficult for SMEs to access finance?

Unfortunately, in the eyes of traditional banks, SMEs are often viewed as inherently riskier than larger, more established businesses. This is because it is difficult for banks to evaluate their risk profiles in the same way since these organisations often lack the solid accounting systems and necessary data. The complicated nature of assessing their creditworthiness often impacts the bank’s ability to provide affordable credit. As a result, many SMEs are forced to look at alternative solutions to get the financial support they require, such as expensive credit lines that charge eye wateringly high interest rates. Neither of these are a sustainable option for small businesses that need to maintain a steady cashflow.

A new approach to SME lending

When it comes to SME lending, a faster, more agile, digital approach is required. Traditional methods, that consist of manual processes and hard copies, are outdated, and fail to meet the needs of SMEs in today’s digital world. This is where Creditinfo and local fintechs come in. Using a digital decisioning platform, it is possible to quickly assess an SME’s entire data footprint and then provide tailored financial solutions. For example, based on our experience working with SMEs and banks in Africa, we can assess the credit risk of an SME by looking at real-time data from multiple sources, including data from e-wallets, credit bureaus and credit scores.

Using alternative data to grant access to finance for SMEs goes a long way to addressing some of the challenges the sector faces. Alternative data is easily created, for example, every time SMEs and their customers use digital services, carry out a bank transaction, make or accept digital payments, use their mobile phones, or manage their receivables and payables through a digital platform, they create alternative data. This real-time and verified data can be analysed to determine both capacity and willingness to repay loans on a case-by-case basis

Additionally, specific SME assessment methodology can be applied. For example, small companies tend to have a greater level of owner centricity. Therefore, business and personal data can be combined to develop highly predictive blended scorecards that utilise the payment behaviour of business owners and managers alongside company credit data to produce a more comprehensive risk assessment.

However, it doesn’t stop there. It’s crucial that central banks play their role and continue to support the SME sector. Globally, central banks are implementing mandates for all banks to lend a set percentage of their credit portfolios to SMEs. These reforms are aimed at easing the flow of cash in the economy and reducing the high cost of credit to a sector that is considered an engine of growth for these economies and a key component of our financial ecosystem.

Digital transformation of SME lending

Thanks to new solutions and alternative data, SME lending is rapidly growing. Globally there is a shift toward digital lending solutions, which is imperative to supporting SME lending and providing them with equal opportunities as their larger counterparts. Through prioritising the needs of customers and using new solutions and data, the SME sector will go from strength to strength and continue to make a difference to global economies.

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