Small and medium-sized enterprises (SMEs) are the backbone of most economies. They are responsible for the majority of job creation, innovation, and economic growth.
SMEs need access to capital to start up, expand, or weather tough times. SME lending has become an essential part of the financial services industry.
However, the financial landscape is always constantly changing. New technologies and regulations are reshaping the way that lenders do business.
So, what trends are shaping the future of SME lending?
New data-gathering options to assess SME risk
Historically, one of the main reasons lenders have been hesitant to lend to SMEs is because they are high-risk borrowers. However, additional data sources and big data analytics are changing the way banks assess risk.
Lenders can now gather more data on SMEs than ever before. This includes business performance data on things like revenue, expenses and cash flow. This data can create a more accurate picture of an SME’s financial health.
In addition, social media and public records can provide valuable insights into an SME’s management team, business model and growth potential. This information can help banks assess the risk of lending to an SME and make better-informed lending decisions.
Data and analytics to drive SME lending decisions
As data becomes more readily available, lenders are placing an increased focus on data and analytics. This is being driven by the need to improve decision-making, reduce costs and manage risk more effectively.
SME lenders will be able to identify trends and patterns more quickly by leveraging the machine learning capabilities in their data, making better-informed decisions about lending.
Data and analytics can play roles in all aspects including:
- Assess creditworthiness: Data can gain insights into an SME’s financial health and business activities to help assess creditworthiness.
- Pricing: Lenders are using data to price loans more accurately. This means that businesses will get a loan that is better suited to their needs and financial situation.
- Risk management: Identifying early warning signs of problems and taking corrective action.
- Target-specific segments: By understanding the needs and characteristics of different SME segments, lenders can develop targeted products and services.
- Monitor portfolio performance: Using data to track how a portfolio is performing and identify areas for improvement.
Greater focus on customer experience
There is tangible growth in needs-based banking, as small businesses seek more personalised and straightforward banking products that save them time.
Not only do those who wish to stay afloat have to turn their attention to providing a better customer experience, but they also need to stand out against their competitors.
Some tactics that lenders are using to improve the customer experience for small businesses include:
- Enhancing the borrowing process: Streamline the application and approval process to make it simpler and faster.
- Providing more flexible repayment options: Offer borrowers greater flexibility on how and when they repay their loans.
- Increase transparency: Be upfront about fees, interest rates and repayment terms. This will help borrowers understand the true cost of their loan and make it easier to compare different offers.
- Improving customer service: Make it easy for borrowers to get in touch with someone who can answer their questions and resolve any issues they may have.
Digitisation and online lending
The banking sector is under pressure to digitise to remain competitive. This is particularly true in the SME lending space, where there is a growing need for faster and more convenient borrowing options.
SMEs are expecting a more digital borrowing experience that is simple, fast, and efficient. This includes the ability to apply for a loan online and get an instant decision.
Lenders are responding to this demand by increasing their investment in digital capabilities. This includes developing online platforms that allow businesses to apply for loans and track their application status in real time.
In addition, SMEs are also looking for lenders who offer digital tools and resources that can help them manage their finances more effectively. This might include things like predictive cash flow forecasting, financial advice, and budgeting and accounting tools.
More collaboration between banks and FinTech
FinTech companies have developed several innovative solutions that have improved the way banks operate, from mobile banking apps to blockchain-based platforms. This has led to a growing number of partnerships between banks and FinTech firms.
There are several reasons more collaboration between banks and FinTech is the future for both banks and small businesses. For one, FinTech companies bring a lot of expertise and innovation to the table. They can help banks to develop new products and services that meet the needs of their customers.
In addition, FinTech firms often have a better understanding of the latest technology trends. This enables them to develop new solutions that can give banks a competitive edge.
Furthermore, partnering with banks can help FinTech companies to tap into new markets. Banks have a large customer base and extensive distribution networks. This can help FinTech firms to reach a much larger number of potential customers.
The lending landscape is constantly evolving, and the needs of SMEs are changing along with it. It’s hard to predict exactly what the future will bring, but we can be sure that lenders will need to be adaptable and innovative in order to meet the ever-changing needs of SMEs.