Giving SMEs a boost with accessible finance

The topic of financial exclusion is usually associated with underbanked consumers and often focuses on those living in the developing world. However, it has also been limiting and frustrating smaller businesses around the world for many years – long before COVID-19 shut down economies and brought cashflow to a standstill for so many.

Significant numbers of SMEs have struggled to access financial services at a reasonable cost in a way that supports business success and growth. With trade for many SMEs dramatically and unexpectedly lower in 2020 than in previous years, these challenges are amplified.

Happy SMEs make happy economies

SMEs are a vital part of the global economy: in the EU alone, there are more than 22.2 million in the non-financial business economy, making up over 99 per cent of all the region’s businesses, and accounting for 67 per cent of EU employment. The European Commission reports that SMEs contribute more than half of all business turnover and generate more than half of all value added in the non-financial business sector – worth €3.5bn in 20171. These businesses clearly represent a significant opportunity, yet these innovators of the global economy are not always well-served by existing financial solutions.

Banking Circle research found that just one in five SMEs have not experienced any difficulty borrowing from a bank to support their business, highlighting a damaging imbalance in the support available to SMEs. Indicating the potential impact of financial exclusion, nearly a quarter of respondents to our survey said that struggling to access additional funds would lead to having to let employees go. More than 1 in 10 felt the business could ultimately fail as a result.

The recent study, a Europe-wide survey involving more than 1,500 SME online merchants, found that nearly two thirds (64.6 per cent) have needed extra finance in the past two years (excluding borrowing due to the current COVID-19 crisis). Nearly a quarter (23 per cent) needed the additional funding to cover payroll, and a further 26.5 per cent to cover regular business costs.

Although needing to access extra funds is a fact of life for many businesses, our research highlights the serious gap in how easily and quickly funding can be obtained. This gap will have an even greater impact in the coming months of post-Covid-19 economic recovery.

Just under a quarter of respondents had to wait between three and four weeks to receive the cash they needed to cover essential costs, yet 26.4 per cent felt that without access to new cash they would be forced to let employees go. And almost a quarter (24.4 per cent) believe their business would ultimately fail if they were unable to access new finance.

Businesses of all sizes are currently facing a whole new set of pressures, but the strain is felt most keenly by smaller businesses. The Banking Circle white paper, ‘Mind the Gap: How payments providers can fill a banking gap for online merchants’, highlights the continued issue of financial exclusion for SMEs – and the opportunities for payments providers. These organisations are already connected to online merchants and are perfectly placed to play a crucial role in providing wider banking services, as well as access to funding.

Barriers to banking

The world of digital commerce is a rapidly growing sector, but it is also a sector where entrants face multiple barriers to operate because established financial institutions have a fear of the unknown. Opening a bank account is fundamental for most enterprises but can feel like taking an exam. And access to short-term funding, whether to fill a cash flow gap or to underpin growth plans, can involve multiple hurdles often too steep for smaller businesses to get over.

However, payments providers already supporting the online merchant space can deliver a genuine added value by providing their merchant customers with banking services including access to funding. In the current climate that support is going to be more valuable than ever. Indeed, for payments providers that demonstrate a real understanding of SME needs there could be a significant long-term gain.

At Banking Circle, we have always been committed to improving financial inclusion for smaller businesses, and our in-depth study helps us and the wider industry to identify – and therefore help to fill – gaps in the current offering. As an innovative financial infrastructure provider that aims to help financial institutions work together to improve financial inclusion for smaller businesses, we are not held back from innovation by outdated and slow legacy systems. Instead, we build our solutions from the ground up, based on gaps in the market we identify through detailed market research

The full white paper, ‘Mind the Gap: How payments providers can fill a banking gap for online merchants’, is available to download for free here