Here’s how limited lending options lead to SMEs lacking capital

By Puja Sharma

Despite the boom in new SMEs created in the last two years, access to funding remains a constant roadblock with 32% of these businesses experiencing difficulty securing starting capital, rising to 33% of SMEs launching soon.

Over 90% of SMEs would switch lenders for better or different services, with digital options growing in importance. Nearly half of SMEs rely on family and friends as barriers to external funding grow during the pandemic. Almost a third of SMEs are struggling to hire due to funding roadblocks amid the Great Resignation.

More than two-thirds (67%) of small and medium-sized enterprises (SMEs) globally have been unable to secure sufficiently, or any, funding on at least one or more occasions, according to a new report from cloud banking platform Mambu.

The ‘Small business, big growth’ report surveyed over 1,000 SME owners globally, who set up their company and applied for a business loan in the last five years. It reveals that reliance on personal networks has increased 11% during the pandemic, with shrinking access to external capital for SMEs.

Despite the boom in new SMEs created in the last two years, access to funding remains a constant roadblock with 32% of these businesses experiencing difficulty securing starting capital, rising to 33% of SMEs launching soon.

Nearly half (43%) of SMEs had to rely on friends and family for loans overall, with this figure rising to 47% among businesses launched since March 2020 and 48% of those launching soon. Of the SMEs unable to secure sufficient funding, 34% experienced cash flow issues, 33% were unable to launch new products or services and 30% were unable to hire effectively – a major impact amid the ‘Great Resignation’.

For larger SMEs, with 101-250 employees, being unable to access funding has curtailed their ability to hire (40%), scale-up (36%), or pay for upgrades or improvements (36%).

The findings come amid a rise in alternative lending, as SMEs turn to challenger banks and FinTech to overcome common barriers. The opportunity for new entrants is clear as the vast majority (92%) of SMEs say they are open to changing lenders for different or simpler digital support.

Nearly half (49%) of SMEs cite better borrowing benefits and incentives as the top reason to change lenders. Meanwhile, 47% would switch for better financing options and 35% for improved digital services.

Demand for more digital options appears to be directly related to the pandemic. Two-thirds (66%) of both SMEs that launched after March 2020 and those set to launch shortly said that digital services are an important lending consideration, versus just 53% of businesses that launched before this date.

Eugene Danilkis, CEO at Mambu, said: “SMEs are the lifeblood of the global economy and responsible for driving growth, job creation, and the post-pandemic recovery. But they are facing big challenges. Access to external funding has become difficult during the pandemic amid record demand for financing and increased friction in the lending process. It’s no surprise SMEs are ready to jump ship for better, more accessible services. If lenders want to stand out, they must transform and modernise their financial experiences to ensure SME success; this includes faster onboarding and loan decisions, harnessing the power of the cloud, and offering mobile and digital-first products.”

Financial institutions must do more to tackle challenging application processes for loans. The research found that the longer it takes to apply for a loan is a major influence on SMEs when choosing a lender.

A short application process was cited among the top three most important considerations when trying to secure external financing by more than three quarters (76%) of global SMEs, tied with long-term repayment terms (76%) and narrowly behind low-interest rates (81%).

When it comes to improving the application process, the majority of SMEs reported interest in faster loan decision processing (79%), more flexible loan conditions (78%), tailored offers and services (76%), and low or no collateral requirements (75%).

Richard Lim, CEO of Retail Economics, said: “The pandemic has ushered in enormous changes in how we work, play, and shop, accelerating the democratisation of digital and with its repercussions still reverberating across society. But access to capital is an area where digitisation has matured at a much slower pace. All too often, businesses looking to scale quickly and seize opportunities are choked by exhausting application processes. Stifled by slow and inefficient practices, current lending practices are no longer fit-for-purpose in today’s fast-paced, digital world.”

Key findings

• Nearly half (46%) of UK SMEs relied on family and friends for business loans, making it the top funding source ahead of business partners (28%) and government (27%).
• Nearly a quarter (24%) of UK SMEs say shrinking access to funding is hampering their hiring plans, a key impact amid the Great Resignation.
• 93% of UK SMEs are open to changing lenders for different or better services, with over a third (35%) citing better digital services as a motive to switch.
• Almost half (49%) of UK SMEs say digital services are important when choosing lending, with digital options becoming 25% more important for SMEs globally since the pandemic.
• Government funding was most common among UK SMEs (43%), a third (34%) higher than the global average, second only to Germany where 56% of SMEs secured government funding.