Small business, big growth: Why it’s time for banks to keep an eye on SMEs


Well over a third of UK SMEs would switch lenders for better digital services

What do an Etsy shop and a medtech startup have in common? They’re both part of the bedrock of international business.

The money moves of Silicon Valley giants may grab headlines but it’s small and medium enterprises (SMEs) that are the foundation of the global economy. SMEs represent 90% of businesses (read more here) around the world and, in emerging economies, formal SMEs contribute up to 40 per cent of national income. They also employ the majority of the world’s workforce – according to ILO, representing more than 65 per cent of employment worldwide.

The importance of SMEs has only been amplified. In recent years, we have witnessed the emergence of a new segment of ‘Covidprenuers’, with a recent Mambu survey (read more here) finding that almost a quarter of consumers around the world have set up their own business since the pandemic. And a further 54 per cent say they are now more likely to set one up.

Yet despite this growth and the size of their contributions, SMEs are struggling to get the support they need.

For Mambu’s latest Disruption Diaries report see here, we spoke to 1,000 small and medium business owners around the world who had set up their company and applied for a business loan in the last five years. We found that 58 per cent of UK SMEs had not been able to secure any, or sufficient, funding to cover the needs of their business on at least one occasion.

Issues securing traditional funding mean SMEs are relying heavily on personal networks to drive their growth. In the UK, the top source of funding for SMEs launched in the last five years is through friends and family, with nearly half of the SMEs we surveyed acquiring investment this way.

Although such investment is often much more favourable to SMEs, in regard to interest rates, financial checks and repayment terms, it’s a problem for the wider economy. If wealthy personal networks have become a requirement for successful SMEs, then we’re shutting out large swathes of entrepreneurs who don’t have access to such networks and blocking innovation.

So, what are the issues SMEs face when trying to secure funding?

Our report found that the greatest barriers to funding for UK SMEs are cash flow not being considered strong enough, slow lending speeds, not enough starting capital and rigid lending criteria.

And when UK SMEs failed to secure sufficient funding due to such barriers, over a third were struck with cash flow issues, 27 per cent were unable to upgrade or improve their technology, a quarter were unable to scale and a further 26 per cent couldn’t launch new products or services.

It’s clear that the way banks and lenders have traditionally handled SME lending is no longer fit for purpose. If banks want to strengthen the economy and fuel innovation then they need to transform the ways they offer SME funding.

Shaking up SME lending offers short-term benefits for banks and lenders too. Our report found that 93 per cent of UK SMEs would consider switching lenders if a competitor offered a better or improved offering. The lenders that can create the offerings SMEs are seeking will see a surge in acquisition and steady retention.

It’s not only better loan conditions but speed and user experience that are important to SMEs.

When UK SMEs are looking for lenders, their top three considerations are long-term repayment plans, low interest rates and a short application process.

And when it comes to the application process, SMEs are most interested in banks offering flexible loan conditions, tailored offers and services, and faster loan decision processing.

Digital tools will also tempt SMEs away from competitors. Well over a third of UK SMEs would switch lenders for better digital services, with 45 per cent switching for better borrowing benefits and incentives as well as better financial options.

SMEs’ desire for digitalisation is good news for alternative lenders and an imperative for traditional banks. Alternative lenders have the upper hand when it comes to digitalisation as it typically forms a core part of their identity. If banks want to avoid losing SME customers to such challengers, they need to prioritise their own digital transformation.

SMEs present a huge opportunity for traditional banks and other lenders but many aren’t addressing their specific and modern needs. Outdated lending processes and rigid criteria are getting in the way of growth and entrepreneurs and lenders are losing out.

The future for both lies in transforming SME lending with digital tools that make loan management easy, streamlining loan applications and offering flexible terms that take SME characteristics into account. If lenders can serve small businesses like this, they can create new revenue streams and compete with emerging challengers.

Read the full report Small Business Big Growth here



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