Ninety-two percent of small- and medium-sized businesses (SMBs) reported that they are treated unfairly by their bank, according to a new survey of 200 senior decision-makers of UK SMBs commissioned by Leonne International and conducted by Censuswide.
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The survey also found that just 15% of respondents would consider approaching their bank for financial support this year. Additionally, 19% of respondents are planning to use private equity to support the growth of their businesses this year.
Conventional banks struggle to efficiently serve the unique needs of SMBs, giving alt lenders in the SMB sector an opportunity to fill the gap in service.
SMBs make up the vast majority of businesses in the UK, but banks aren’t offering them the right services. Lending to such companies isn’t as profitable for banks compared with other loans, as they are much smaller than those of larger corporates. Additionally, under Basel III regulations, which are set to be fully in effect by 2027, banks have stricter capital requirements when lending to SMBs, and the bank will have to hold almost twice as much capital against an SMB loan when compared with a buy-to-let mortgage, for example, per Real Business.
This makes lending to SMBs an even less profitable business for banks, likely driving many of them to neglect the segment. Additionally, SMBs often don’t have a long credit history or substantial cash flow, which are the conventional metrics for assessing the risk of a borrower, making it more difficult for banks to offer them loans.
However, fintech alt lenders are changing the finance options available to SMBs by leveraging alternative data and technology. For example, London-based alt lender iwoca lets SMBs connect their accounts at banks and accounting platforms like Xero to make a credit decision, while peer-to-peer lender Funding Circle is able to give businesses a personalized quote within 24 hours, by leveraging technology like quick online applications.
And these startups are growing in size — iwoca has pledged to make £5 billion ($6.5 billion) available to small businesses by 2023, up from the £1 billion ($1.3 billion) it had lent out as of November 2019 — suggesting that fintechs will be able to serve more SMBs in the future.
To even better serve SMBs, alt lenders should team up with other fintechs focusing on different needs of such companies. Beyond lending, SMBs are underserved across various financial services including accounting and tax offerings, as well as bank account options.
They often don’t have the time and resources to research various financial products, so being able to access all services within one platform would significantly improve convenience and efficiency for SMBs. Hence, alt lenders should look into teaming up with accounting startups, like Xero, as well as SMB-focused neobanks, like Tide, to build a one-stop shop for all financial needs. Additionally, they could join existing marketplaces for SMBs like Starling Bank’s, which already includes alt lender Growth Street.
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Source: https://www.businessinsider.com/uk-smbs-are-severeley-underserved-by-banks-2020-3
