Updated on: 24/11/2021

Modern Small and Medium Enterprises (SMEs) represent a significant part of the global economy, accounting for nearly 90% of all modern businesses. Modern SMEs are large contributors to the creation of workplaces and economic growth, especially in developing countries. 

Although they’ve become a vital part of the financial ecosystem, these businesses are facing extreme difficulties in accessing finances. SMEs are often associated with higher risks, sizeable transaction costs, and a lack of collateral—about 50% of small business loans get rejected. 

Many business owners cite this financial exclusion as a key obstacle to the growth of their venture. The common hurdles in obtaining a loan include burdensome processes, low level of transparency, and the high costs associated with searching for a loan. For instance, the research by the Federal Reserve indicates that small business borrowers spend nearly 24 hours on paperwork alone during the loan application process at a bank. 

The problem is global: businesses from East Asia and Pacific regions represent the largest share (46%) of the total number of underbanked SMEs worldwide, followed by Latin America and the Caribbean (23%) and Europe and Central Asia (15%). In 2018, the finance gap between the needs of global SMEs and available funds reached $5.2 trillion, according to SME Finance Forum.

The Crisis

Following the financial crisis of 2008, with the idea of de-risking their balance sheets, large banks started to avoid lending to SMEs by introducing stricter requirements to receive funds. For instance, in the UK, where SMEs represent a tremendous 99.9% share of the 5.7 million businesses, the value of issued bank loans fell to £55.6 million in Q4 of 2018, a 78% drop from its maximum of £255 million in 2009.

The other reasons include the variety of regulations banks have to cope with, insufficient credit history, and the high transaction costs of underwriting and onboarding customers. All in all, providing loans to small businesses has become less of a priority for banks. “If you look at the great recession, what you’ve seen is a bounce-back of commercial lending, but lending to small businesses really hasn’t come back,” sums up Darrell Esch, Vice President of global credit at PayPal. The majority of banks are not interested in lending relatively small amounts of money on a frequent basis. Some banks have introduced a sort of a loan threshold (commonly around $100,000 to $250,000), and won’t engage in loans below this level. The others will not address requests from SMBs with less than $2 million in revenue.

But technology changed the scenery for many small and medium-sized enterprises. In comparison to traditional financial institutions, digital lending companies provide favorable terms on credits. With low-interest margins, faster approval, and without initial fees, they are scaling up quickly and already capitalizing on new scoring methods.

On the Path to Digitalization

Top decision-makers in the banking sphere are aware of the success of alternative lending companies. However, still slowed down by legacy systems, banks are only dipping their toes in digital lending. The outdated technology at banks isn’t the sole issue. At the recent Lending Fintech Europe in London, lga Zoutendijk, a career banker with several decades of experience, said that “legacy culture is a bigger problem at large banks than legacy tech and a much more difficult challenge to overcome.”

For traditional lenders, fintech is an opportunity to innovate and modernize. However, one can’t fight legacy culture alone: on their path to embrace digitalization, bank institutions need a fintech partner to bring technology, speed, and flexibility to the table.

Source: https://lending-times.com/2019/11/06/the-current-state-of-sme-lending/

By Alan WattsA business loan can help you build and improve your credit score

There is no business without capital, and to acquire it, financing is paramount. Regardless of the sector in which a company is developed, it must have financial resources to improve products or services, administrative and operational processes, and develop marketing strategies in line with current needs.

Ideally, all individuals and businesses should have a savings fund to consolidate new projects or improve existing ones. According to information from CNBC, on average, Americans aspire to save only 5,710 dollars by 2022. Given this reality, getting a small business loan, a commercial credit card, or even the support of a credit union are excellent possibilities to consolidate a company.

It is a priority for everyone to work on their credit reputation from the beginning of adulthood. The personal history will be the letter of recommendation to access good financing for a company. Take into consideration that using a personal loan for your business is an appropriate strategy for new companies. Still, in the case of companies with more experience, it is best to turn to financial products such as small business loans, with which you will be able to grow your company's credit history.

How can you get a loan to help improve your credit score?

Obtaining financing is a task that requires focus and perseverance. Most traditional financial institutions have many requirements, making it impossible for small businesses to access funding. The most common conditions are operating for at least two years, having sales exceeding 100 thousand dollars per year, and having a score higher than 650 points.

When a company is in its start-up phase, it is practically impossible to meet this requirement. For this reason, financial products granted by online lenders have emerged, offering small business loans with better conditions, in particular without a mandatory credit score. This allows companies to start building their credit reputation to turn financing into an ally for the growth and success of entrepreneurship.

How can you maintain a good score over time?

Pay on time

Although it may seem obvious, it is necessary to emphasize that the best financing you can obtain is the one you can pay. Complying on time with the agreed payments is your best guarantee to access larger amounts of credit in the future.

Domicile your payment of services to a credit card

Another resource that you can use to your advantage is a business credit card and only pay for fixed services such as internet, rent, gas, electricity, water. This way, you will pay the same and get benefits.

Put your cash in your bank account

If your business receives many cash payments, put that money in your bank account. This way, you will have documentation to prove solid income when you apply for other financings.

Keep your credit utilization rate low

In the case of a credit card or line of credit, try not to use the entire authorized amount. A good recommendation is to keep the credit utilization rate below 10%.

Control your personal credit, separate from your business credit

Getting personal loans to use for your business will not work if you want to build a good credit reputation for your company. These financial products exist to take advantage of these resources and specialized features.

What are the benefits of having a good credit score?

A company with a good credit score is a reliable company. It is undeniable proof of healthy finances, responsibility, and commitment when contracting a debt. Take into consideration that the best ally of business growth is financing because it allows you to obtain capital, which otherwise would take years to get it. Other great benefits of having an excellent credit score are:

- Better interest rates on credit cards or small business loans

- Higher financing amounts

- Easier approval to lease commercial establishments

Obtaining small business loans is an excellent alternative to consolidate growth projects and, at the same time, generate a good credit history and credit score for your company. Having a good relationship with financing is a step forward in consolidating a profitable, successful, and scalable company. Access funding and achieve all your professional goals.