Anders la Cour, Banking Circle: Are SMEs struggling for finance? Not anymore

Why are smaller companies still struggling to obtain funding via traditional banks, and what has been the impact to date? Are the challenges the same across the spectrum of SMEs?

Since the financial crash of 2008, banks have been more cautious, particularly when it comes to lending. As a result, startups and SMEs have experienced a real battle in achieving financial inclusion, having to fight to obtain finance. Whether they need cash to cover day-to-day business expenses or cover the cost of expansion, at some point almost all SMEs will look for extra finance beyond their usual cash flow.

92.5% of SME respondents to our study have needed to access business finance within the past five years. Without access to the necessary cash, a quarter of respondents would have had to let employees go, nearly a third (30%) would have needed to reduce prices, while 39% would have been unable to buy necessary business equipment.

Extra cash does not just make things easier, it ensures that businesses keep employees in jobs, remain competitive in a fast-paced market, and most importantly, it enable businesses to survive long-term. In today’s financial landscape, a business loan application is no longer a simple request, sure to be granted. Instead, it is more often a hard-fought battle to get extra cash the business needs to succeed or expand. Small firms feel this challenge most strongly, as they struggle with the current options available from traditional lenders. High fees and interest rates go hand-in-hand with traditional business loans and put off huge numbers of SMEs from accessing the finance they need to succeed.

Issues were generally similar across the spectrum of SME sizes; the most common problem experienced was that the SME’s usual bank didn’t offer the best rate, for an average of 34.9%. In addition, 32.1% of SMEs with 1-9 employees and 38.6% of those with 100-250 employees faced this problem. Speed of facilitating finance is one area where experiences differ. Only 14.2% of the smallest companies had this problem, compared with 30.7% of the larger ones.

Are new solutions such as peer-to-peer lending, challenger banks and FinTechs able to help SMEs in the long term? Is this the end to traditional banks offering business loans, or can they learn from alternative lending providers?

Banks are often the first port of call for an SME in need of additional finance. Nevertheless, slow set-up, relatively high interest rates and expensive arrangement fees can add to the cost of borrowing and put-off many would-be borrowers. There are many reasons why banks can fail to fulfil the demands of the SMEs, but the most common cause is legacy banking infrastructure.

Specialist lenders can often provide a more cost-effective and faster business loan solution. However, many apply very high interest rates that can make repayments a significant burden for a smaller business. Existing solutions, even those that are newer to the market, cannot provide the scale the global digital business landscape requires, at least not in an affordable or flexible form, which will allow businesses of all sizes to grow, succeed and compete effectively. SMEs need loans to be cost-effective, account management to be simple and accessible, and repayment terms to fit around their business.

A new generation of innovative, affordable, forward-thinking lenders, able to move quickly without legacy systems holding them back, are entering the market to meet this need breaking down financial exclusion. And it seems the marketplace is open to these new offerings: 58% of respondents to our research said they would approach a non-bank for a loan, if it offered low interest rates, and 44% would do so for lower arrangement fees. Financial Utilities are able to support Financial Tech businesses and banks in providing customers with a better solution.

How about the latest-enforced directives and regulations? Are these helping or hindering the area of business borrowing? How can PSPs add value for treasurers seeking business finance?

Open Banking, through PSD2, has changed the European banking landscape forever. The systems and infrastructure have opened, allowing non-banks to provide innovative solutions to better serve end users. API technology has allowed Financial Tech companies to provide preferential FX rates, lower fees on international payments, and faster approval of loans.

Banks that fail to keep up with the pace of innovation will risk losing their customer base, with a serious impact on revenues. Therefore, PSD2 is forcing the market to become more competitive, meaning it is offering consumer and business customers a better service.

PSPs can work with new providers, including Financial Utilities such as Banking Circle, to offer businesses low-cost, fast, and flexible lending solutions. Whether that is through receivables factoring or a longer-term loan, new solutions are designed with the customer’s needs at the centre, rather than the incumbent’s abilities and what fits within their traditional infrastructure.

How is Banking Circle helping to break down the barriers to small business borrowing?

Banks and FinTechs wishing to succeed in the digital era need to focus their time and resources on improving and maintaining the all-important customer relationship. This leaves little room for investing in developing and delivering new solutions – solutions, which would meet the current and future needs of SMEs. However, financial institutions must do all they can to keep up, or they risk losing out to new entrants.

Financial Utilities like Banking Circle are stepping in to provide banks and Financial Tech businesses with the capability to offer their merchant customers better solutions. Transparent, easy-to-manage, flexible, low-cost lending solutions.

Banking Circle recently launched Banking Circle Lending. Going to the heart of one of the perennial business challenges – that of managing cash flow – Banking Circle Lending enables FinTechs and banks to offer their merchants fast access to cash, without any credit exposure to their business. Moreover, the solution provides an extra revenue stream for Financial Tech firms, as well as banks that are keen to digitise, providing them with the facility to offer loans to their merchant customers.

Banking Circle Lending is all about quick decisions and flexible repayment options. Rather than the average 60 days it takes a traditional bank to extend a new loan, the entire application process takes up to 72 hours with Banking Circle Lending.

In your opinion, what will the business lending space be like in ten years’ time?

Banks and Financial Tech businesses are already beginning to move towards an ecosystem model, working in partnership with third parties to provide tailored solutions which meet the ever-changing needs of the customer. Bank and FinTech customers benefit from a better service at lower cost, without the financial institution having to put in the usual significant investment to develop solutions in-house.

Working together with specialist providers, banks, and Financial Tech businesses can provide their customers with affordable and flexible access to the cash their business needs to grow. Increasing competition and customer expectations have created a tough climate; the only way for financial institutions to prosper long-term is by embracing this ecosystem model.

About Anders la Cour

Anders la Cour is Chief Executive Officer at Banking Circle. He used his experience in legal M&A as well as in venture capital, coupled with a strong commercial acumen and entrepreneurial mind-set, to co-found Banking Circle (then known as Saxo Payments) in 2013, with backing from Saxo Bank. He is also a board member of YouLend and an adviser to other financial technology businesses.

Anders was named Entrepreneur of the Year in the 2016 Emerging Payments Awards and Gamechanger of the Year in the ACQ5 2018 Global Awards, in recognition of his leadership in bringing to market the innovative Banking Circle solution to tackle the cost and time challenges of cross border payments. He was appointed to the Emerging Payments Association Advisory Board at the end of 2016.

About Banking Circle

Next-generation provider of mission-critical banking infrastructure, Banking Circle is underpinning the service proposition of Financial Tech businesses, PSPs, FX providers and banks. By leading the rise of a super-correspondent banking network, Banking Circle is helping financial institutions to provide their customers with faster and cheaper cross border banking solutions, without the need to build their own infrastructure and correspondent banking partner network.