Key SME Financing Problem and How Can Digital Lending Address Those
Finance forms the life blood of any business. While the idea behind the product or service is the first step in bringing the business to life, in order for it go on and grow, financing is an absolute requirement. However, this is an area which is extremely difficult for most SMEs, small businesses and startups to navigate through.
Traditionally, business owners and companies have always looked at banks and financial institutions to address their loan requirements. However, ever since the subprime crisis of 2008, most financial institutions and banks have come under strict controls and need to adhere to stringent regulations. This has definitely not been helpful for small businesses, as the only business whose financing applications the banks consider seriously, are those of large corporations.
This is understandable given the regulatory framework the banks are monitored with. They like to keep their risks low and finance corporations which can readily show regular and steady cash flows and have enough assets to back their loans, something the small business owner cannot guarantee.
Many a time, while going through loan applications of small businesses and SMEs, financial institutions take the owner’s personal credit score as a marker of credit risk which does not show the actually creditworthiness of the business and also lessens the chances of loan approval if the owner’s credit score is not up to the mark. Banks and financial institutions are helpless here as they use the traditionally created scoring models that apply to big business clients. When applying these templates on SME requests, underwriters need to make a number of judgement calls and make multiple system overrides. The lack of seamless loan process origination suited to their size of business and revenue causes businesses to lose out on easy financing options. Accessing credit has thus become a pain point for SMEs, small businesses, and startups.
Apart from the above, there are other financing issues that many small businesses face when trying to grow and expand their business. Here’s a look at a few of them: Lack of enough working capital
SMEs and small business owners need a minimum of 6 months of expenditure as working capital, so that they can focus on expanding their client base, getting the word out, and producing the products and services they are marketing. This working capital requirement might be quite a big sum for a small business to come up with themselves. At the same time, the amount of working capital required is too small for traditional banks and financial institutions to consider and underwrite keeping in mind the costs and risks associated with such loans. Late payments from clients
This is one of the biggest worries that most SMEs face. Not receiving your receivables on time can hurt their businesses badly in the long run. Money stuck with clients due to non-payment means a badly oiled working capital situation, which means having to run into frequent debts to keep the business afloat. To avoid this, small business owners should clear payment policies early on, incentivize early payments, and enforce penalties for late payments. Choosing the wrong funding option
Although it is difficult to receive financing from banks and financial institutions, there are multiple other financing options for SMEs to choose from such as; business loans, crowdfunding, bootstrapping, venture capital, angel money, or raising money from family and friends. In spite of having so many options, business owners often make the wrong call and raise money on the wrong platform, i.e., a platform which does not really align to their goals. In order to make the right choice, it is important for business owners, to ascertain why they need the loan in the first place, have a good understanding of their current financial situation, find out the risk tolerance for each of the funding options they have and finally take a pick only after conducting thorough research on each option.
It is true that if banks and financial institutions were readily providing loans to SMEs and small businesses as they did for their bigger clients, or as they did earlier for small businesses, many of these problems wouldn’t matter much. However, all is not lost when it comes to easy financing options for small businesses. Digital lending helps SMEs finance their various requirements, quickly and effectively through ingenious financing products.
How digital lending is acting as a game changer in SME financing
Digital lending has been liberating for SMEs. It solved one of the biggest financing problems for them, i.e., lengthy credit underwriting using traditional models. Instead, they replaced older templates with new age analytics, psychometrics, social media behaviour and other dynamic factors which helps digital and peer-to-peer lenders sift through and originate more loans in lesser time, and the best part: at competitive interest rates.
Fintech has helped ease the process of lending to SMEs by using Big Data, Business Intelligence, and analytics
helping alternative lenders and new age financiers expand to one of the most important industries: Small and Medium Enterprises. Digital lenders have found out what kind of financing matters most to the average small and medium business owner and have tailored financial products to cater to these needs. The result is a slew of hybrid financial products
which have their base in traditional products but come with new features that are more conducive to the interests of their target audience, the small business owner.
Also, thanks to the costs they have been saving by using fintech to conduct their loan origination processes, these digital lenders have been able to provide loans to SMEs at competitive rates, thereby giving SMEs today multiple options to choose from.
The technology they use is a single poh working capital dashboard which is used for tracking the loan from application status to disbursement status, thereby giving both lender and borrower a clear view of the process, allowing maximum transparency and also seamless user experience for both.
Following are some of the new-age financing options that are available to SMEs who choose to opt for digital lenders to finance their business. Invoice financing
This is a great option for SMEs who have a lot of accrued invoices tied up due to non-payment by clients. SMEs can hand over their accrued invoices to the lender as collateral and collect money against it with which they can continue to pay their vendors and keep their business running smoothly. Merchant advances
This lets SMEs borrow a lump sum from the lender which they can pay back as and when they make sales, along with an additional fee. This is one of the easiest loan options to opt for, as the SME needs to furnish previous cash flow statements to the lender and if the latter finds it satisfactory, the money the SME has applied for will appear in their bank account the next working day. Repayments, too, are easy with automatic deductions right from the borrowers account based on their daily sales, thereby freeing both parties of unnecessary hassles. Line of credit
A line of credit, also known as an open-end credit, is popular among SMEs given the flexibility it offers. In this financing method, the lender and the borrower decide on a maximum amount which will be disbursed to the borrower, from time to time. The borrower will keep repaying the amount borrowed as and when they have enough cash flow to honour the repayment obligation. As long as the amount borrowed is within the limit decided upon, the borrower can keep borrowing and repaying the amount, as per requirement. Disbursement can be either in the form of cheques, drafts, or credit or debit cards with a set limit. Online loans
Loans are available to SMEs at competitive rates as low as 6.5 percent and in as little as 24 hours. The loan portfolio includes bespoke loans for specific requirements such as small business loans, equipment financing, franchise loans, bad credit business loans, and equipment financing loans, among others.
These options are just the tip of the iceberg which is the world of digital lending. It holds the promise of seamless financing options that SMEs needed for a long time now.