It’s no secret that small and medium-sized enterprises (SMEs) face intense challenges trying to gain access to funding. According to a Bank of England report, one in four small firms that apply to banks for loans are rejected, leading to an estimated £22 billion funding gap for UK SMEs.
When it comes to lending, no one-size-fits-all solution exists to transform the current situation for SMEs which contribute over £2 trillion for the UK economy every year. There are various methods and solutions out there in the market. Open platform funding passports that contain company-wide financial data is one idea that has attracted backing from the Federation of Small Businesses, Atom Bank and Funding Circle UK.
In an open letter to the Business Secretary, Grant Shapps, UK fintechs recently called for the government to pass the Data Protection and Digital Information Bill and include a section that sets out a plan for SME financial data. A funding passport would contain all financial data related to an SME and be shown to lenders to help improve their assessment processes.
In practice, a digital passport file could be easily shared with lenders and offer a real-time view of the financial health of a firm. Providing a standardised report for lenders to access with ease would enable many financial service providers to assess if a firm is suitable for funding.
Research published last year from the Federation of Small Businesses uncovered the extent to which SMEs are finding it difficult to access funding. They found less than one-in-ten small businesses applied for finance in the first quarter of 2022, with successful applications falling to 43% in the same time period.
New SME funding opportunities
Organisations like Metro Bank have been working to find innovative ways to provide SMEs with fast access to finance. In 2020, Metro Bank partnered with lending-as-a-Service (LaaS) provider ezbob to enable applications to be made quickly and easily.
A leading alternative lender, ThinCats, announced they would be providing up to £300 million to UK mid-sized SMEs, thanks to funding from the British Business Bank’s ENABLE Guarantee programme. By offering SMEs a streamlined application process and bespoke funding structures, ThinCats have been able to reach almost 500,000 business customers to-date.
Instead of just searching through bank statements provided by the SME, forward-thinking lenders are incorporating a range of alternative credit data to make better lending decisions. Thanks to APIs, everything from digital wallets to e-commerce statistics and accounting systems can be taken into consideration.
Both quantitative and qualitative information can be used for companies that may have high popularity scores on social media platforms or other online spaces. It’s essential for the lending system to better recognise the unique financial positions each SME finds itself in, as traditional ways of funding are not working.
All in all, the use of APIs can result in data being presented in an easily readable format that makes the application process quicker and may result in higher approval rates.
