Mind the Gap; Alternative lenders become beacon of hope for SME community

By Scott Donnelly, Managing Director, CapitalBox

The 2008 recession hit small and medium enterprises the hardest. Fewer businesses were founded, many had to lay off their staff and others didn’t make it through. Funding conditions were unfavourable but years later, small businesses could see the light at the end of the tunnel with better economic conditions favouring their turnaround.

We are however back in a situation today where small businesses are fighting for their survival. The Great Lockdown means that a fifth of small businesses are at risk of collapsing.

Access to financing for small and medium businesses has never been more critical.

The Great Lockdown

Small and medium sized enterprises, more commonly known to you and me as SMEs, are responsible for more than two thirds of all jobs worldwide. They have over the last two decades become the beacon of innovation, boosting economies across the world in particular in developing countries, and are the largest contributors to job creation and global economic development.

According to a study by the World Bank, prior to the pandemic 600 million was the number of estimated jobs needed by 2030 to absorb the growing global workforce, and who was expected to pick up the bill? SMEs.

From ‘The Great Recession’ to ‘The Great Lockdown’, here they are again, caught up in the height of the worst recession on record – with the likes of Italy, Spain, France and the UK shrinking in the last week by double digits, the biggest economic contraction in 25 years.

Over the years, we have relied heavily on SMEs to create jobs and drag economies out of recessions and crisis. This time should be no different – as long as they have the right access to finance and a strong liquidity backing.

Traditional funding can’t keep up

During the 2008 recession, small businesses didn’t create jobs; they lost them. With a decline of around 60% from pre-recession, small businesses managed to show-off their resilient nature and come back fighting, creating almost 62% of jobs a decade later.

You would assume that big, and smaller, banks would be looking to fund these enterprises all the way to stardom. Backing them from inception to scale up. This isn’t the case. In fact, it is the complete opposite.

Of course, SMEs do present concerns: their creditworthiness is sometimes questioned due to their smaller balance sheets. However, by now, and after decades of their exuberance and ambition to fightback and tech driven improvements in data analysis and credit scoring, you would think old mindsets would change.

The pandemic led to banks locking up their lending altogether. A repetition of 2008 when lending virtually came to a standstill and didn’t pick up for years after. They were no champions of the SME cause.

During the pandemic governments around the world provided support funds, furlough schemes and business rate reliefs. These are however short-term solutions which don’t help longer term case flow issues.

In the UK, the Coronavirus Business Interruption Loan Scheme, which only opened up to SMEs at the end of July, relies heavily on lenders to provide support to those in need as companies started to reopen and restart their operations. Financing needs to come from providers who understand the specific needs of SMEs – with a flexible approach, quick turnaround times, and who can leverage technology and machine learning to make better decisions.

Future of financing is an alternative option

Alternative lending has been a go-to substitute for financing SMEs for the past several years. This avenue of funding differs from traditional banks and is typically more flexible, faster and has a higher approval rate.

Traditional banks are struggling to keep up with the arrival of fintech innovators offering this type of lending.  The ability to leverage the latest technology without the hindrance of legacy systems and organizations has allowed fintech companies to move quickly and efficiently into the gaps left unserved by conventional banks.

CapitalBox, for example, was founded based on the premise of financing the underserved micro SME segment – under 10 employees, which comprises of 90% of SMEs in Europe. Being innovative, not following rigid and legacy bank policies, and heavily digitising the business, has enabled us to fund thousands of SMEs across Europe.

This is the time for alternative lenders to shine and be the catalyst for economic recovery once again. The pandemic allowed us to bring to the forefront the need to adapt quickly using technology. We are able to change our scoring algorithms and processes to deal with the crisis and continue to serve, albeit at lower volumes, the companies not being served by conventional banks.

Keeping up with the customer

The pandemic has changed the way companies do business and many of them have been forced to speed up transformation plans.

The same goes for those providing finance to the SME community – from legacy banks to the more modern fintech, we have a ‘new normal’ today where customers expect fast interactions and support via a variety of channels

Customer expectations will never return to what they were before COVID-19 hit, and this goes for financial institutions too. It is clear that traditional loan processes are not able to keep up with the fundraising experience that SMEs are now looking for and need to survive.

It is down to alternative lenders to fill the gap – quicker processes with turnarounds of 48 hours so that SMEs across Europe can once again play a huge role in our economic recoveries.

There is a huge uphill battle ahead of us as we go through the worst recession on record but through partnering with the right type of lender, it will be possible to achieve it.

SMEs are renowned for their resiliency and agility. They have overcome hurdles like no other and with the ability to adapt to strenuous circumstances, they truly are the backbone of our economies across Europe. They now need all our support.