While armies of politicians, policymakers and academics were debating how big the SME funding gap is, why it is so persistent and how to close it, a silent revolution was brewing in the most unlikely, unexpected and the most “boring” places of all — SME Business Finance infrastructure.
With quiet confidence, a new breed of payments, e-commerce and advertisement infrastructure providers like Stripe, Square, Magento, Shopify, Google and Facebook significantly increased their market share. In addition, the cloud accounting software packages like QuickBooks in the US, Xero in Australia and Megi in China — which promise to make SME accounting easier by offering a clear financial overview, ability to easily track invoices, user-friendly credit controls, and automated daily bank feeds — have grown their collective revenues by over 250% 2015-2020. These trends are having a far-reaching and irreversible impact on SME business finance.
Unlike large vertically integrated corporates, SMEs often perform a niche value-added activity within their supply chain like delivering shale oil drilling services in Texas, manufacturing high-quality lenses for smartphones in Germany or selling holiday caravans in the coastal areas of the UK.
It is this dependency on the supply chain that makes SMEs very vulnerable to external shocks. According to OECD data, SMEs have a relatively low default rate of c.2.5% in a benign economy which skyrockets in recessions. The SME default rates went up to 12% in the United States during the 2008 Global Financial Crisis and might end up even higher in the looming 2020 financial crisis despite policymakers’ best efforts to support lending to SMEs. This inherent SME business cyclicality compounds the funding gap.
Yet, several agile finance players, powered by modern technology and infrastructure, identified and successfully exploited the SME lending opportunity by offering better customer-centric experience, relevant, timely and seamless risk assessments and access from anywhere and anytime.
Direct integration into CRM systems like HubSpot and Salesforce, payments gateways, e-commerce infrastructure providers and specifically accounting packages like Xero and QuickBooks, allowed Relationship Managers at these companies, to get insights into SME business operations, provide valuable advice and to offer more relevant financing products. Information feeds from government companies registers and risk analytics engines like Wiserfunding helped Underwriters and Risk Managers to understand the risks within the supply chain, enabled them to approve credit within hours and helped them to take timely actions. Modern, scalable and componentised open API cloud-based technology platforms which run on AWS, Azure or Google Cloud allowed their Platform Administrators and Engineers to build better financial products using data-science, configure and launch them faster across multiple geographies.
We are currently moving to a world where any SME with a sound profitable business model can get financing on-demand in line with their needs. The 2020 financial crisis and other global issues are causing a significant shock to the global supply chain, which will in turn accelerate this secular trend. To move to this new world SMEs just need to embrace digital technologies, be prepared to be transparent and look around for the right partner.