"Alternative lenders have the ability to adapt to the ever-changing market, they are nimbler than banks and can provide more unique and bespoke funding facilities."
Small and medium-sized enterprises (SMEs) are the bedrock of the world economy, representing approximately 90% of businesses and generating over 50% of employment. Yet, despite these figures, prior to the Covid-19 pandemic, only 15% of SMEs had access to the finance they needed to fuel their growth plans. There’s a funding gap of $5 trillion, between what banks are prepared to lend and the demand from SMEs.
As the pandemic hit in 2020, access to finance from High Street banks became increasingly difficult. In response, SMEs have turned to independent lenders and fintech companies to meet their financing needs.
As a small business owner, you’re probably hesitant to pursue your growth plans, due to the Covid pandemic, and worries about access to finance. However, lessons can be learned from the last major downturn in 2008, where a wave of new start-ups emerged during the global financial crisis (GFC). Success stories, such as Uber and Airbnb were formed during those uncertain times. Rather than looking at traditional financing routes such as banks, SMEs are beginning to explore alternative funding solutions from independent lenders and fintech companies.
Fintechs and the digital shift
These lenders work differently, with online lending at the core of the ‘fintechs’. It all started during the GFC of 2008 which caused significant mistrust in the financial system, this created an opening for technology-enabled financial institutions to grow.
In the past year, many digital lending platforms have acted swiftly in response to a rise in loan applications. Fintech companies deploy cutting edge technology, such as artificial intelligence (AI) and automated underwriting. They can access current data to assess a borrower’s creditworthiness. Slick systems and processes speed up the entire funding application process. Historically, funding applicants would have to hang fire for a few weeks or months to receive a decision on their application. By contrast, fintech companies can give a decision within minutes.
Lenders will have to embrace fintech in order to maintain their position in the market. Although rate has to be one of the main drivers in advising clients, speed and processing has to be considered and fintech is the answer. We may see more and more brokers advising access to faster funds if the financial difference in cost to the client is minor.
Alternative funding solutions make sense
Alternative funding solutions can be accessed through a reputable business loan broker. A broker has established relationships with a variety of lenders and can potentially source better terms than you could find, acting alone.
Alternative lenders have the ability to adapt to the ever-changing market, they are nimbler than banks and can provide more unique and bespoke funding facilities. Fintech is also a huge tool in the AFS offering as it utilises Open Banking and e-signatures to name a few. I believe that over the coming months and years, alternative and non-bank lenders will provide essential funding to a huge range of businesses that may be locked out of traditional banking solutions due to their sector, or pandemic trading. These businesses will require speed of processing and access to money quickly, so the need for technology will be huge and it will make the broker and client process much more efficient.
How SME finance options will change
It is encouraging to witness independent lenders and fintech companies entering the SME finance sector during the pandemic. We anticipate that it is these kinds of lenders who will drive the revolution in SME financing. If we rely, solely, on High Street banks, it doesn’t stimulate competition. This will ultimately strip SMEs of lending choice and availability. The fintech companies and independent lenders have held their own during the pandemic; they have the capability and agility to handle the crisis. We believe these traits are key to addressing the requirements of a vastly important SME sector.
Alternative lenders will drive the revolution in SME financing.