Closing the funding gap: How alternative lenders the secret to SME survival in Europe

Published On : 09/07/2020

By Scott Donnelly, Managing Director, CapitalBox

Costing a shocking 5.7 million jobs, the 2008 financial crisis caused the demise of 1 million small businesses. These businesses have since spent years, rebuilding their brands, staff, value and reputation. Today they find themselves in a situation that might be even worse.  Small and medium sized businesses, the backbone of our society who fuel our working and social lives, are struggling to keep their heads above water.

The three-month lockdown has placed small businesses in great danger and many of them are in need of immediate funding.

Despite this, small and medium businesses seem to ever be the optimist with the majority remaining positive about the future. Only 19% of businesses think that the COVID-19 global pandemic will have a damaging effect this time next year.

Optimism, ambition and an entrepreneurial mindset, combined with the right funding will help in bringing that 19% to zero.

The unwelcome recession

Small and medium sized enterprises, more commonly known to you and me as SMEs, are responsible for more than two thirds of all jobs worldwide. They have over the last two decades become the beacon of innovation, boosting economies across the world in particular in developing countries, and are the largest contributors to job creation and global economic development.

According to a study by the World Bank, prior to the pandemic 600 million was the number of estimated jobs needed by 2030 to absorb the growing global workforce, and who was expected to pick up the bill? SMEs

From ‘The Great Recession’ to ‘The Great Lockdown’, here they are again, caught up in the height of the worst recession on record – with the likes of Italy, Spain, France and the UK shrinking in the last week by double digits, the biggest economic contraction in 25 years.

Over the years, we have relied heavily on SMEs to create jobs and drag economies out of recessions and crisis. This time should be no different – as long as they have the right access to finance and a strong liquidity backing.

Operation fight back; keeping up with the technology of today

During the 2008 recession, small businesses didn’t create jobs; they lost them. With a decline of around 60% from pre-recession, small businesses managed to show-off their resilient nature and come back fighting, creating almost 62% of jobs a decade later.

You would assume that big, and smaller, banks would be looking to fund these enterprises all the way to stardom. Backing them from inception to scale up. This isn’t the case. In fact, it is the complete opposite.

Scott Donnelly

Of course, SMEs do present concerns: their creditworthiness is sometimes questioned due to their smaller balance sheets. However, by now, and after decades of their exuberance and ambition to fightback and tech driven improvements in data analysis and credit scoring, you would think old mindsets would change.

The pandemic led to banks locking up their lending altogether. A repetition of 2008 when lending virtually came to a standstill and didn’t pick up for years after. They were no champions of the SME cause.

During the pandemic governments around the world provided support funds, furlough schemes and business rate reliefs. These are however short-term solutions which don’t help longer term case flow issues.

In the UK, the Coronavirus Business Interruption Loan Scheme, which only opened up to SMEs at the end of July, relies heavily on lenders to provide support to those in need as companies started to reopen and restart their operations. Financing needs to come from providers who understand the specific needs of SMEs – with a flexible approach, quick turnaround times, and who can leverage technology and machine learning to make better decisions.

Fintech vs traditional banking

Alternative lending has been a go-to substitute for financing SMEs for the past several years. This avenue of funding differs from traditional banks and is typically more flexible, faster and has a higher approval rate.

Traditional banks are struggling to keep up with the arrival of fintech innovators offering this type of lending.  The ability to leverage the latest technology without the hindrance of legacy systems and organizations has allowed fintech companies to move quickly and efficiently into the gaps left unserved by conventional banks.

CapitalBox, for example, was founded based on the premise of financing the underserved micro SME segment – under 10 employees, which comprises of 90% of SMEs in Europe. Being innovative, not following rigid and legacy bank policies, and heavily digitising the business, has enabled us to fund thousands of SMEs across Europe.

This is the time for alternative lenders to shine and be the catalyst for economic recovery once again. The pandemic allowed us to bring to the forefront the need to adapt quickly using technology. We are able to change our scoring algorithms and processes to deal with the crisis and continue to serve, albeit at lower volumes, the companies not being served by conventional banks.

Please mind the gap between banks and SMEs

The pandemic has changed the way companies do business and many of them have been forced to speed up transformation plans.

The same goes for those providing finance to the SME community – from legacy banks to the more modern fintech, we have a ‘new normal’ today where customers expect fast interactions and support via a variety of channels.

Customer expectations will never return to what they were before COVID-19 hit, and this goes for financial institutions too. It is clear that traditional loan processes are not able to keep up with the fundraising experience that SMEs are now looking for and need to survive.

It is time for alternative lenders to close the funding gap before it is too late. Operations such as quicker processing and approval times, turned around within 48 hours, can ensure that SMEs across Europe can carry on scaling their business.

As we wade our way through the worst recession on record, small businesses must put their confidence into the right type of lenders to achieve success. After all, the stakes are high.

Renowned for agility, toughness and flexibility SMEs are like no other and are therefore the perfect candidate to overcome this challenge. Now more than ever we must join forces to support European SMEs and subsequent economies in light of the unstable surroundings we live in today.

Wanda Rich

Wanda Rich has been the Editor-in-Chief of Global Banking & Finance Review since 2011, playing a pivotal role in shaping the publication’s content and direction. Under her leadership, the magazine has expanded its global reach and established itself as a trusted source of information and analysis across various financial sectors. She is known for conducting exclusive interviews with industry leaders and oversees the Global Banking & Finance Awards, which recognize innovation and leadership in finance. In addition to Global Banking & Finance Review, Wanda also serves as editor for numerous other platforms, including Asset Digest, Biz Dispatch, Blockchain Tribune, Business Express, Brands Journal, Companies Digest, Economy Standard, Entrepreneur Tribune, Finance Digest, Fintech Herald, Global Islamic Finance Magazine, International Releases, Online World News, Luxury Adviser, Palmbay Herald, Startup Observer, Technology Dispatch, Trading Herald, and Wealth Tribune.