SMEs are underserved by traditional long-term lenders and banks. Alternative lending is clearly not a passing trend.
In the past few years working capital and short term capital loans have played an increasingly important role for SMEs when they want to access funds to support their growth plans, finding they are underserved by traditional long-term lenders and banks. It’s clearly not a passing trend.
To gain more insight into the current and future opportunities in working capital, we talked with lending industry experts Ricardo Pero CEO SellersFunding, Peter Beckman COO Treyd, and Jack Trowbridge Commercial Director, Growth Lending who shared their thoughts with us.
1. SMEs need more support post-pandemic
UK’s SMEs make up 98% of the domestic economy, and were hit hard by the 2020 pandemic. To survive they had two options: to ride it out on their existing funds, or access pandemic-related Government loans. Government loans saw businesses through the worst during the pandemic, but these same businesses are now looking for more flexible finance options post-Covid. SMEs who didn’t receive Government loans are finding it hard to get the loans they need to grow from traditional banks.
Says Growth Lending’s Jack Trowbridge, “During the pandemic SMEs got through the woods, and are now eager to grow. The working capital model is really important right now for this reason - they need the money to move forward.”
Treyd’s Peter Beckman notes, “Traditional bank lending is based on security, which is built on fixed assets. They have a very safe, vanilla point of view. In contrast, the new economy is not based on fixed assets: ecommerce brands don’t own factories, SaaS providers don’t own buildings, or make their own products. It’s why we are seeing different types of balance sheets now.“
Traditional banks are less understanding of ecommerce and the new way of doing business, and this is highlighted with cross border lending. Says Sellers Funding’s Ricardo Pero, “Local banks in the US won’t lend to a foreign company, not even a UK company trading in the US. This makes global growth plans difficult for SMEs.”
2. Giving credit credit
Since 2008 there’s been a stigma against credit. Alternate lenders looked after SMEs during the pandemic, providing credit at the point of need, and they helped reverse the credit stigma by letting SMEs feel comfortable about why they are using it: that the funding is there to promote their growth, and that it’s much less expensive than selling equity.
Beckman says it’s important to make life easier for entrepreneurs. “We speak a lot about the SaaSification of building a business. Alternative lenders do the same for funding these businesses. They want to make funding easy and accessible without being irresponsible.”
“The word ‘debt’ is often seen as something that you get when the ship is sinking, but it’s something you should get when building the ship.” Jack Trowbridge, Commercial Director, Growth Lending
3. Borrowers win thanks to innovation
Innovation in lending is being driven by alternative lenders. Many are start-ups themselves, aware of the pain points business owners face when trying to grow their business. Alternative lenders’ lack of legacy systems makes it easier for them to innovate and adapt to start-ups’ immediate needs. This means they are more agile and flexible: able to give loans in hours not weeks.
Beckman points to three Fintech innovations that are central to what’s happening in alternative finance: first, the immediate value that Fintechs create, the offer is just there and easily accessible to borrowers. Secondly, Fintechs create niche products that are scalable and automated so they become excellent at a particular type of business. Thirdly, APIs are letting businesses integrate their services how they want to, at speed.
“Banks have a much more limited tool set than Fintech lenders, making it hard for them to scale and address niche markets.” Peter Beckman, COO Trey
4. Data is the key to lending
Access to data is critical for the ability for alternative lenders to offer loans to start-ups and ecommerce businesses who have no physical footprints, or assets like buildings, to act as security. The information these Fintech lenders need comes from specialized data - a space they are inherently more comfortable in than traditional banks.
“It’s easy to see why data analytics comes into play with ecommerce: it accelerated in the pandemic and continues to do so. The ability to provide flexible, longer financing terms as being is very attractive to clients.” Ricardo Pero CEO Sellers Funding
5. Alternative lenders and embedded finance - a natural fit
The ability to embed finance and access a range of markets is a Fintech superpower. Even better, embedding is all about putting the customer first, whether it’s a consumer or a business. Embedded finance lets alternative lenders find niches that banks can’t see, allowing them to support businesses previously turned away by banks.
Says Beckman of the benefits of embedded finance for consumers,“It is the ultimate customer interface. What Fintech brings with embedded is an extra layer of trust between the merchant and the consumer, for example Klarna BNPL. This is very important in the global economy.”
Trowbridge highlights the benefits of embedded finance for businesses, explaining that a lender can embed straight into a business’ accountancy software which can pull down their client information, making onboarding seamless, easier and quicker, so businesses can grow faster.
Ricardo Pero Sellers Finance,. “With embedded, customers don’t need to move from one platform to another. They can finance that cost in one place - there's no need to go to a bank and get approval, it’s all there. It’s a great customer experience.”
“We have built our service on other embedded services like Currencycloud” Peter Beckman Treyd
6. Alternative lenders: facilitating export growth
“It’s hard for SMEs to get bank finance for export funding. The alternative finance space should be acting as the next player down to offer SMEs support for export growth, and funding subsidiaries outside the UK and providing provision to enable selling in a cross-border space. Cross-border financing is the next step in this, Covid has brought everything forward by about 5 years.” Jack Trowbridge, Commercial Director, Growth Lending
Future trends…
Beckman believes that it makes sense for alternative lenders to remain niche within verticals. “There’s still a lot of fuel left to be a specialized lender for different business types like ecommerce vs SaaS. An interesting evolution might be where the neobanks offer integrated niche lending services. That would be a natural evolution and how a superapp may evolve.”
Pero notes there’s not one true answer with specialization. “We operate on a broad niche, and focus on the customer solution. For example we are focusing on making a mobile solution for our customers where they can have their credit information and see their balances on their phone. We’ve worked with Currencycloud to create this.”
Banks are an alternative
The global growth in ecommerce and start-ups during the pandemic has meant alternate lenders have grown too. Sellers Funding has tripled in size since the start of the pandemic. Ricardo Pero points out this isn’t because they offer lower rates than banks, but because they are more adaptable to their customers’ needs. “We’re not banks. There is a limited ability for us to be more competitive on price. Flexibility is our main differentiator. Not price.”
Trowbridge agrees. “If you’re a new lender you are going to get the debt you’re lending with from alternative lenders: you will be putting it out there at a slightly higher price, but you will be offering a premium product. Or you can raise funds from a traditional bank, if they are open to that, and offer your customers a slightly lower rate.”
Flexibility is the key differentiator between banks and alternative lenders who thrive on being adaptable. Cost versus flexibility is the choice their customers are making, and the direction of travel is pointing in the direction of the alternative lenders.
To gain more insight into how embedded finance can open up opportunities in working capital and help SMEs grow, one of our team will be happy to talk to you. Contact our payments experts.
“We never see banks as something bad. We see them as partners or potential partners. So I think in the near future Fintech will merge with banks.” Ricardo Pero SellersFunding
