Steven Renwick, CEO of business finance firm Satago, explains how a new breed of FinTechs has emerged to transform the SME funding landscape.
Disruptive innovation designed to break the stranglehold of dominant business models shows no signs of abating. Netflix, Amazon, Uber and Airbnb are the doyens of the on-demand economy as we know it today, inspiring entire generations of technology-driven businesses to challenge established models and strategies.
However, the financial services industry, long overdue radical transformation, has been slow to embrace (or arguably quick to resist) this form of disruptive thinking.
To be perfectly frank, when we started to look at the SME finance market, we were pretty shocked at how little the commercial finance industry had changed. Traditional lenders may now offer multi-channel delivery, including mobile, tablet, instant messaging and webchat, but when you peel away the veneer of digital delivery, the products haven’t altered fundamentally for decades.
SAP’s Digitalist Magazine recently said: “There is a lot of talk about digital transformation by banks, but the reality is that – despite what they say – they are not doing it. What the vast majority of banks are actually doing is digital enablement. They are simply using digital technologies to do what they are doing today, only slightly better. There is nothing transformational about what they are doing.”
The key imperative to market disruption is to re-imagine a new ecosystem that meets the needs of the customer, not the lender.
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For far too long the focus has drifted the other way, fostering an environment in which big bank rules have prevailed unchallenged and facility limits and ceilings have continued to restrict the growth of SME businesses.
Selectivity is the key
Traditionally, banks have been the primary source of working capital funding for SMEs. However, regulation has meant that increasingly these large financial institutions have to be very selective in terms of the companies to which they will provide funding, regrettably leading to the exclusion of many small businesses. Basel III regulation is putting banks under growing pressure to maintain higher capital ratios as they look to rebuild their capital bases and de-risk their balance sheets, making lending to small businesses far less attractive to them.
This enforced reticence to lend to SMEs is causing huge cash flow headaches for small businesses, especially those that have relied upon bank financing in the past to plug short-term funding gaps.
Ironically, this selectivity in terms of underwriting from the large market incumbents has created an even greater choice for SMEs than ever before – in the form of a new wave of nimble, digitally driven alternative financiers.
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By leveraging cloud technology, real-time data and analytics tools, these new FinTechs are able to provide businesses with fast, flexible and frictionless funding on a scale hitherto unimagined.
Here, selectivity has a positive part to play. For many years, the only invoice finance options available to businesses have been based on a ‘whole sales ledger facility’, in which they are locked into a contract and the attendant fees – which can prove a very costly form of working capital indeed. Today, through leveraging cloud technology, business owners are able to obtain access to cash (previously tied up in approved invoices) instantly on demand – on a selective basis. Unlike before, they are now completely free to decide when and how much they borrow, and for how long; giving them greater oversight of costs and far more control over their borrowing.
The game-changing technological advancement that has driven this level of finance innovation is the ability for providers to seamlessly integrate their applications with leading business accounting packages. Connect, click, cash: It really is that easy for businesses to access the working capital SMEs need instantly, 24/7. They simply choose the invoices they want to finance and they are paid on demand.
Harnessing cloud technology to improve financial health
Funding on demand is not the only digitally-driven transformation on offer. Alternative financiers are also harnessing cloud technology to give smaller businesses tools that will help them get paid on time. These enhanced credit management capabilities are already succeeding in improving the financial health of small businesses, reducing the time they spend on credit control by up to 80%.
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This provides the same level of sophisticated credit management and dashboards to SMEs as their far larger competitors, effectively leveling the playing field. It allows for real-time cash flow monitoring at a glance, as well as greater risk oversight and management.
When you consider that the deaths of 50,000 businesses through late payment could be avoided every year – this is a vital innovation.
In the face of falling access to traditional lending, SMEs can be assured that there are now better alternatives; agile FinTech-based options designed to offer business owners flexibility and control without the overbearing constraints of their predecessors.
Now on-demand business finance is a reality, business owners can focus their energies on what is most important in their lives – fulfilling their business ambitions.