Two sides of the same coin – The SME lending journey

How lenders can use data to drive quicker, more informed loan decisions for small and medium sized businesses.

Small businesses in search of working capital often rely on loans to help them through choppy early waters. In some cases, relatively small amounts can mean the difference between success and failure. 

Banks and other lenders are constantly looking for ways of staying competitive in an increasingly crowded market and reducing the cost of service to their SME clients. As a result, lenders need to be able to make decisions quickly and accurately to help their clients get up and running and minimise exposure.

But the marketplace is changing. Traditional lenders, often affected by legacy infrastructure and unwieldy manual processes are facing stiff competition from a variety of alternative lenders who can offer quicker, simplified loans that are sometimes all an SME needs to solve their short-term cash-flow issues.

Here, we will look at the SME lending journey from both sides – and highlight some of the factors that can come into play. 

What SMEs want: Fast, hassle-free loans

Most small businesses experience cash-flow issues during their first few years of operation. With much of their early investment going on setting up shop and recruiting staff, they are often reliant on external help simply to stay afloat.

Financial forecasting is essential, and most SMEs will already have a picture of what investment they think they require and when they need it by. So, the more convoluted their lending journey, the greater their chance of disillusionment.

When looking for a loan, SMEs need a decision fast – but they also need to trust that their lender is giving them a fair deal. Price is a key consideration for businesses, as is the process itself, and how smooth the prospective lender can make it. 

Traditional banks have the benefit of being credible and affordable, but they can also be frustratingly ponderous. Smaller alternative lenders can get SMEs the cash quickly – often the same day, even – but they might be more expensive, and they certainly lack the reputation of the big banks.  

Loyalty is still a major factor. Today, most SMEs that identify a need for finance will still approach their main bank first. But as competition hots up and the smaller lenders develop more compelling alternative solutions, the race is on to attract new business as well as servicing the needs of existing customers.

What lenders want: To lend more while minimising risk

For lenders, SMEs represent a huge opportunity. There are 1000 new businesses launching every day in the UK for example, and many of them are searching for that elusive working capital that will help them get off the ground.

But there are logistical challenges throughout the lender’s journey. There are considerations around regulatory compliance, customer expectations and the global marketplace. The bigger banks also have to contend with clunky infrastructure and a lack of joined-up thinking across diverse departments. Without technical cohesion, credit risk teams end up using manual processes such as data collection and covenant calculation to make simple lending decisions for relatively small amounts of money.

This can play into the hands of their competitors, who have far less red tape and are more likely to be able to streamline the process. Digital lenders claim to be able to make lending decisions within minutes, with funds released the same day. Inevitably this exposes them to more risk, but it makes them extremely attractive to SMEs who need access to funds fast.

For all lenders, the key is to find a balance that gives them a competitive edge. Increasingly, that means using data to leverage more insight, more quickly in order to accelerate and de-risk their lending decisions.

Using management accounts data to make better lending decisions

Whatever route they have taken, the lending journey for both the SME and the lender ends with a decision based on a credit risk assessment.

But what data does a lender need to get their hands on in order to make that decision with confidence?

Traditionally, they have relied upon historic P&Ls and balance sheets, maybe procured from the business themselves or Companies House. These datasets are certainly useful but can lack granularity or timeliness. Being able to access real time management account data can give them a more nuanced and detailed view of the SME they are considering.

The beauty of management accounts is that it is black and white. It is objective and very hard to misinterpret which means a fair and transparent process for both lender and borrower. It can also reveal a lot about the way a company’s finances are run, providing valuable insight into the day-to-day management of the business.

If a credit risk department can optimise the data assets available to them, they will be able to make clearer, faster lending decisions while exposing themselves to minimised risk. Front of house staff can drive huge efficiency gains by collecting data digitally, ensuring the lender as a whole is lowering its cost to serve. This all represents a “Win-Win” scenario for both the SME and the lender.

Open Accounting can help support SMEs

Validis is the market’s leading Open Accounting data provider, helping financial institutions access and interpret management account information for small and medium size businesses. Our comprehensive suite of APIs provide massive efficiency gains, revolutionising time consuming, manual processes, while the depth and structure of the data delivered powers auto-decisioning and actionable lending intelligence.

For more information on how you could unlock value through management account data then please get in touch.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top