SME finance: what needs to change to create better outcomes?

The asset finance ecosystem has done much to improve the funding options available to SMEs in the past decade, but its focus on a single product or process, rather than a holistic approach to SME requirements as a whole, is undermining efforts to help businesses grow, according to the findings of a Finance Connect webinar which concluded much wider and closer collaboration is needed between SMEs, lenders, brokers and policymakers.

“In terms of speed of decisioning, access to capital and product diversity, there have been massive improvements in the SME market, but availability is not the same as a healthy market.

“We’ve got a system optimised for speed and transaction volume, rather than a focus on long term outcomes,” is how Paul Goodman, chair of Goodman Corporate Finance, summed up the position.

One indicator is the increasing number of SMEs stacking up multiple short-term loans, each taken out to solve a specific cashflow problem. Not only do monthly interest payments soar, but the business is at risk of long-term damage by failing to address the underlying causes of the financial instability.

Responding to immediate requirements quickly but failing to take the longer view means lenders and brokers miss out on opportunities to offer a structured series of steps design to help SMEs build a sound business.

Moreover, Steve Bolton, managing director PEAC Solutions UK, argued that pressures on lenders to streamline operations so that decisions are faster decision making risked opening the way for “bad actors” to exploit system weaknesses and, as Finance Connect CEO Edward Peck pointed out, could offer claims management companies a new foothold following the motor finance commission redress scheme.

Data gap

As well as the focus on speed and volume, Bolton noted that post the financial crisis and the ringfencing of the major banks, “never before have so many SMEs been served by so few relationship managers”. For the big banks, the answer has been to rely on technology to service those customers cost efficiently.

But as Jason Hurwitz, sales director Europe with NETSOL Technologies, sponsors of the webcast, explained “a lot of that technology is geared up to a single transaction or to serve a specialised or individual need, and the industry is very siloed. To make progress, lenders and brokers need to look at needs holistically”.

For that, Bolton argued that all players across the funding space, not just the clearing banks, need more detailed data analysis in order to make better informed decisions. Rather than looking at a one-off transaction, brokers and lenders should be considering each SME’s performance relative to competitors in their particular market segment and size, building a picture of likely requirements.

The other big challenge lies in tackling the key issue identified in an online webinar poll of barriers to better SMEs outcomes. Almost half of attendees (48%) cited lack of knowledge of funding opportunities amongst SMEs as the number one problem and identified an urgent need for more education.

“SMEs don’t have the time to weigh up the options and don’t understand the finance on offer. That’s a crucial bit that’s missing,” Steve Bolton said.

Goodman agreed, saying the industry urgently needs to “move away from point in time credit towards journey-based finance. The British Business Bank’s start up finance programme has been a big success but the next challenge is working with the SME to build up their business over two or three years.”

Collaboration

The panel saw a role for technology, notably AI, as a way of bridging the knowledge gap by creating profiles of different types of finance product along with a template of the circumstances in which they might best be employed on a universally available platform. However, a critical concern was how such a service could be developed.

“Where does this sit – is it something a public body like the British Business Bank runs, which is agnostic as regards customers, or would a private enterprise take this on,” Jason Hurwitz queried.

And as Goodman pointed out, such a service would only be the starting point, as it would likely require a broker to match the SME with the most appropriate finance provider. However, there are signs that the wider financial services industry is behind this concept, as the Financial Conduct Authority has recently talked about a SME having a “data wallet” allowing SMEs to share data about their business as a way to source better finance options.

Certainly, a quarter of webinar attendees felt technology had a role in identifying SME needs, along with a third who saw finance education as an essential.

Next steps

“What we are seeing is a need for systems to be redesigned to improve outcomes. And that is not the responsibility of any one part of the lending ecosystem. The government wants SMEs to help grow the UK economy, and we can provide the engine for that, but the current approach is too fragmented. While the industry’s trade bodies have a role, representation and stewardship are two different things,” Goodman maintained.

Bolton agreed that a very clear frame of reference is required, perhaps along the lines of the response to the Arena fraud case which saw a commercial operator develop a database for general use.

Hurwitz pointed out that “technology should follow the business strategy. The hard bit is working out what you are trying to achieve, but it’s clear technology can help create a cross-industry body with advice for SMEs.”

Indeed, 43% of webinar attendees saw setting up such a platform as the most important next step, while 40% endorsed cross-sector action to break down siloes and encourage better collaboration.

“The SME market is not broken, but it is fragmented and transparency and standards have not kept pace. We as an industry should be designing credit so that once we touch a business, we can ensure it is stronger 12 months later,” Goodman said.

Given that independent research shows just under half of SMEs report no interest in accessing finance over the coming year that is a challenge, but the panel agreed tackling the demand side of the equation was the way forward.

“The SME lending market is at a pivotal point – and the prize for those who get it right is large.

“The government has made it clear SMEs are fundamental to plans for growth, and we as an industry can provide the funding for that,” was how Edward Peck, Finance Connect CEO, summed up the situation.

“Our webinar discussion made clear that there is a real push for better collaboration between SMEs, lenders, brokers and policymakers. Creating the framework so that this can happen is critical, and I would urge anyone who has ideas about how to do this to get in touch and share their views. At Finance Connect we stand ready to support the industry to be the best it can be for the SME sector.”

Missed the webcast? Watch on-demand at https://finance-connect.com/videos/.