Too slow to “Help to Grow”: why SMEs need better financial support

Mikkel Velin at YouLend argues that the UK government needs to change the requirements of the “Help to Grow” scheme and the banking industry needs to reform their lending criteria for small business

 

For small and medium-sized enterprises (SMEs) across the country, the latest eligibility requirements for the UK government’s Help to Grow scheme will be disappointing – but not surprising. This is the latest chapter in a familiar story for small businesses over recent years, where funding has been inaccessible if a business has only been trading for a certain amount of time or if total revenue falls below a certain limit.

 

What’s more, according to the British Business Bank, three in five merchants reported seeking some form of external financial support in the 3 years leading up to 2020, compared to two in five for the 3 years to 2019.

 

So, in an era where businesses are more varied than ever – and need more financial support than ever – why are lenders still only considering outdated and incomplete indicators to assess SMEs’ eligibility for funding?

 

And, perhaps most importantly, what do lenders need to do to facilitate change?

 

A lack of financial inclusion

To qualify for the UK government’s Help to Grow scheme, businesses must have at least five employees and must have been trading for at least 12 months. This excludes hundreds of thousands of SMEs. It also highlights that there is a deep misunderstanding about what data is needed to determine which SMEs should qualify for support.

 

And it’s not a problem limited to government funding. It is one that is played out time and time again across traditional lenders.

 

These small businesses are often locally run, supporting their owners’ families and allowing them to lift themselves into a higher income bracket – further fuelling the economy.

 

So why are government programmes still preventing solutions to these solvable problems, by continuing to refuse to implement the technology that will enable financial inclusion?

 

Times are changing

The answer lies in an ultimately outdated understanding among traditional providers around what data is useful and effective when vetting SMEs.

 

Today, SMEs are more varied than ever. More and more entrepreneurs are taking the plunge – with up to 600,000 start-ups in the UK today, compared with as few as 100,000 in the late 1990s.

 

Just look at the world of e-commerce, where the number of employees does not reflect the value that a business adds to the economy. An online shop may be run by one person – but can still bring in more revenue than a 10-person bricks-and-mortar business, as well as supporting other businesses in the value chain, such as suppliers, service providers and business customers.

 

YouLend research indicates that 16% of businesses are side hustles, which are typically run by one person. Such businesses are very unlikely to be eligible for funding and support based on current, or traditional, qualifying metrics.

 

And yet, they enable their owners to supplement their income and have potential to become significant contributors to the economy.

 

What’s more, 21% of female-owned businesses are side hustles. For many of these women, their side hustles are a necessary source of income and financial independence. In denying these businesses financing, the government is undoubtedly perpetuating the gender pay gap and slowing down the journey to gender equality.

 

Looking ahead

All of this means that a more sophisticated and nuanced approach to assessing SMEs’ eligibility for support is needed. Currently, traditional lenders are only looking at part of the picture: namely size, credit-payment behaviours and time in business.

 

While these are useful indicators, enhanced information that identifies non-credit payment behaviours, and metrics that track perception of the SMEs amongst their customer bases, must also be considered when it comes to determining future success and risk levels.

 

What’s more, resilient SMEs – new and old – are operating online and taking omnichannel approaches. This provides a wealth of new data, which is more sophisticated than ever before. Lenders just need the right approach and a willingness to invest in more sophisticated technology and analysis.

 

In order to get a full picture of the health and future growth trajectory of a business, lenders today must incorporate analysis of digital marketing and commerce metrics, such as website users, dwell time and repeat website visits – all of which provides unique insight of customer loyalty to merchants.

 

Data received from merchants is often subjective and vulnerable to manipulation. By taking data directly from the merchants’ website or platform, lenders have the benefit of higher objectivity and transparency in the data they are using – as well as ensuring that is updated in real-time. To support SMEs effectively, there needs to be a full overhaul of how SMEs’ eligibility for financial support is assessed.

 

A symbiotic relationship

This is possible today. And, for both the government and for banks, this is a mutually beneficial move.

 

For the government, supporting this crucial market will provide a much-needed boost to the economy. 

 

For banks, providing better support for SMEs could be crucial in them maintaining this sector of the economy as a client base. The proliferation of e-commerce platforms and payment service providers mean that SMEs have more options when it comes to lending solutions.

 

If banks don’t want to lose out on this market share, they have to leverage cutting-edge technology and analytics in order to match the fair, convenient, personalised and affordable lending solutions that SMEs can increasingly find elsewhere.

 

These banks must start paying attention and making themselves familiar with the latest in lending technology – not only for SMEs’ sake, but for their own sake, too.

 

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Mikkel Velin is co-CEO at YouLend

Main image courtesy of iStockPhoto.com