By Arina Osiannaya, Director of the Business Funding Show
Financial technology, or FinTech, has redefined the way in which money changes hands. From helping businesses to manage costs to establishing efficient payment relationships, FinTech is an industry that has come along way in recent years. It’s prospects show no sign of abating in 2016 either.
And nowhere is this growth more keenly felt than with our nation’s SMEs. They power the economy, employ millions of people and support individual responsibility. According to The Economist, around 99 per cent of all non-financial companies in the European Union are SMEs. They also account for 66 per cent of jobs. Yet, despite their collective size and value, to understand the reason that the advances in the FinTech sector are so exciting for SMEs, it is important to put into perspective what preceded it because, in recent times, one group that has been less keen on lending to SMEs is banks.
Their reluctance to lend to SMEs has been well-documented. The government has tried various measures to coerce banks into financing small businesses, with varying degrees of success. However, in spite of all the initiatives, government promises and bank brand rhetoric, the fact remains that getting a bank loan for an SME remains an arduous process. There are many reasons behind this. Fundamentally, banks have complex systems and huge infrastructures that have not evolved at the speed of other industries. It means they just don’t make a lot of money from a small loan. This is why the branch banking model no longer works.
Yet, in spite of this, banks remain the number one choice for small businesses looking for funding. Although, not for long. Times, they are a changin’. Because banks have been reluctant to give out small loans or lend to self-employed prospects, it has created a perfect storm for FinTech (alternative finance). Small, nimble start-ups that are happy to lend and SMEs that look beyond the high street banks for investment. The result is a veritable feast of options when it comes to gaining access to funds.
The market is littered with innovative new players helping to move money from one place to another. Firms like Everline are helping businesses realise they do not have to rely on high interest services to get a quick loan. Businesses can instead turn to an online partner that can have funds in their accounts within minutes. In the crowdfunding space there are platforms like Crowdcube, which enables entrepreneurs to bypass the traditional business angel, venture capital or bank finance routes, giving them more control and access to more investors. When it comes to P2P lending, online-only start-ups like Unbolted and Ratesetter provide a simple and fast opportunity for borrowers to receive immediate funds against their personal assets, in complete privacy.
In addition to the many popular alternatives to established lending practices like P2P or business Angels, new FinTech ideas are emerging from original concepts, to include platforms like LendFriend, where individuals can borrow and lend money to people they know. While, outside of this innovative group of FinTech companies, The British Business Bank is also helping by aiming is to make finance markets work better for small businesses in the UK at all stages of their development: starting up, scaling up and staying ahead. This is just the tip of a very big iceberg.
But it’s not just getting money from one place to another that has improved. One element that SMEs have always tended to level against traditional lenders is the volume of red tape and the time it takes to navigate. What we are also seeing in the FinTech space are a whole host of tools that provide compliance assistance. Perhaps understandably, this space lags behind that of the actual practice of lending, but it’s an area we will see grow in 2016 and beyond with many firms determined to find solutions that make these challenges easier to handle.
But what does this actually mean for businesses? Apart from making it quicker and easier to obtain finance, the explosion in FinTech means SMEs are becoming increasingly educated to make smarter financial decisions, encouraging them to save money and presenting more financially sound as well as understandable investment strategies. From tools that provide educational formats to help businesses evaluate their financial status right through to just having simple, clear and easy to understand messages that help empower borrowers to make an informed choice.
One thing is clear. The growth of FinTech has shaped the SME lending market for the better. Getting access to funds is quicker, simpler and cheaper than ever before. But this is not the time to rest on its laurels. There remains a monumental amount of work to do when it comes to helping businesses make sense of all the developments in the industry, how it is moving on and what this means for their businesses. To quote the famous political slogan of the 90’s, UK SMEs need ‘education, education, education’to help differentiate what lending option is best for each individual need. However, one thing is for certain, this is an exciting time for both the UK's SMEs and its thriving FinTech market.