For SMEs, access to finance is a significant challenge. They need affordable lending solutions, improved credit risk scoring, and less friction. But banks often fall short of these objectives. While each of these approaches has merit, if they fail to commit to one main approach, the result is a hybrid. Banks should focus on the unique challenges faced by SMEs to meet their funding needs. Listed below are four ways to improve bank offerings for SMEs.
SMEs struggle to access finance.
SMEs across India face significant challenges when it comes to securing access to finance. With commodity prices reaching record highs, the lack of accessible finance has led to a lack of capital for small businesses. These businesses are struggling to grow and remain competitive, which in turn has a knock-on effect on the recovery of the continent’s economy. A recent study exposed that almost two-thirds of SMEs needed extra finance to meet regular business expenses, while nearly a quarter needed funds for payroll.
One of the main barriers for SMEs to access finance is speed. Only 3% of SMEs were able to obtain funding in less than a week. Two weeks is a long time in a rapidly-changing market, and a week is too long for SMEs to wait. In addition, larger SMEs struggled to secure loans, taking longer than smaller companies. However, this doesn’t crucially mean that the SME cannot access finance.
There exist several reasons why small companies are unable to access finance. One reason is that small and medium-sized enterprises cannot qualify for formal tax brackets. They are also not subject to stringent employee regulations and do not have to register their companies in order to get finance. The problem has become a growing concern for the European Union, which has set up the Small and Medium Enterprise Action Plan (SMEP). With a streamlined loan application process, the World Bank is aiming to bridge this gap. The plan also intends to improve financial sector infrastructure and introduce lines of credit directly to SMEs.
They need affordable lending solutions
The lack of affordable lending solutions in India is one of the biggest challenges facing small and medium-sized enterprises (SMEs). While many banks have been able to attract small and medium-sized enterprises by lowering their interest rates and increasing the size of their customer bases, the process remains cumbersome and largely paper-based. For this reason, SMEs need innovative and flexible lending solutions to overcome these problems. Listed below are three key challenges that small and medium-sized enterprises face.
First, banks must rethink the way they offer their lending services. According to an EY Global SME survey, the most requested service from banks was guaranteed access to faster credit, faster approval processes, and certainty of funds when they need them most. Second, corporate banks need to rethink their approach to lending. With the COVID-19 pandemic affecting the business world, many banks are only just coming to grips with the power of digital.
While traditional banks are affordable and credible, they can be frustratingly slow. Fortunately, there are alternative lenders that offer a quicker loan process. A smaller, faster loan from an alternative lender can help solve a company’s short-term cash-flow problems. While smaller alternative lenders don’t have the brand name of big banks, they still provide an excellent service for SMEs. And while they may be more expensive, they may not have the same reputation as a large bank, but they can be more flexible and competitive.
They want better product offerings and less friction.
Banks have focused on the consumer market in recent years, but SMEs now represent a huge opportunity. In addition to greater revenue potential, SMEs also generate returns of between 10% and 15% on equity, providing significant opportunities for financial institutions. One recent trend to drive change is the “gig economy,” a flexible work culture where members opt for working as freelancers or independent contractors. This trend is expected to continue as more businesses are looking for more innovative and convenient banking options.
The current environment for SMEs has many challenges: low-interest rates, tighter regulation, and rising customer expectations. Traditional banks haven’t been capable of keeping up with SMEs’ growing expectations. Despite this, they still hold a large portion of the financial services industry’s business. Small and midsize businesses want better product offerings and less friction when banking. SMEs are increasingly turning to alternative digital providers to improve their customer experiences and attract new customers.
Banks can meet the needs of SMEs by offering more tailored products. Using an anchor product doesn’t solve the problem of a healthy product or meet capital costs. Rather, they must devise auxiliary products and credit offerings that meet SME needs and demonstrate a lower-cost process to be reliable. In other words, they need to become day-to-day companions for SME development.
They want better credit risk scoring.
Banks and other financial institutions have a huge stake in the success of SMEs, but historically, they’ve fallen through the cracks when it does come to assess their credit risk. Small businesses, often referred to as SMEs, are too small to be covered by credit rating agencies, and they are too small to afford data-driven statistical credit risk, scoring models. Instead, they have relied on ‘expert judgment’ based on the knowledge of individual underwriters about the business sector and firm. These reliance’s on ‘key person’ risk, lack of transparency, and lack of consistency have made the process of assessing SME credit risk a highly subjective and difficult one.
Currently, banks collect considerable amounts of information during the credit scoring process. This information is used to categorize customers, track risks, and determine credit-related issues. The hybrid approach is the best choice for SME credit risk scoring, as it combines financial and non-financial factors. The study also considers the characteristics of SMEs and the performance of their major shareholders, which differ from the general credit scoring models.
Banks require to adapt their business models and credit policies to meet the needs of SMEs. Small & medium-sized enterprises (SMEs) are increasingly looking for more efficient lending processes and faster credit approval. Lenders can change the way they serve SMEs by adopting new technologies, data, and analytics. And if they do that, it will help them transform their credit risk offerings. And it will serve as a springboard for further ecosystem services.