Small and medium-sized businesses (SMEs) are critical drivers of economic activity and employment creation in all economies. Micro, small, and medium-sized firms contribute 60 percent to 70 percent of the GDP of low-, middle-, and high-income countries, respectively. They account for around 90 percent of enterprises and more than half of all jobs in the globe.
Finance is the lifeline of these businesses, however, SMEs generally have a tough time availing formal or informal credit to sustain their lifespan. Lack of access to finance is a critical barrier to growth for SMEs globally, with only 40% of SMEs having access to any formal credit. The uncertainty in their cash flows emanating from late invoice payments, unplanned expenses and other short-term exigencies further accentuate the need for timely credit. This segment also does not have access to liquid equity market funds hence end up relying on funds from friends and families to meet their financing needs.
The traditional lending processes are designed for much larger companies seeking much larger loans, banks impose strict rules and are usually quite prudent of extending credit to SMEs, SMEs suffer due to tedious loan procedures, huge paperwork, long disbursal periods, high-interest rates, information asymmetries, absence of traditional data used by banks to assess credit worthiness , lack of collateral and onerous documentation requirements.
CHALLENGES SMEs FACE IN PROCURING LOANS:
● High degree of frauds in this segment
● Longer TAT in credit decision making & the related release of credit further exacerbating opportunity cost for SMEs
● Limited traditional data points to underwrite the SME loans
Recent advances in fintech and innovative business models are proving to be a game changer that can help close the SME finance gap by enabling smaller firms to have a better access to finance. Online have simplified the application processes, offering efficiency and quick decision making. The borrowers can initiate an online application with their business and personal details, upload the documents and get instant approvals. The digital transformation, though, in its infancy, has the potential to reduce lender’s operational costs and increase their productivity in faster credit decision & related credit expansion to the SME segment.
The new age fintechs and alternative lending platforms have an edge over the traditional banks and lending system because they do attempt to underwrite basis traditional as well as alternative data points including social footprints, bureaus as well as AML (automated machine learning) driven data triangulation and collateral information.
These platforms seamlessly automate multiple credit processes by extracting data from the provided documents, compiling and curating the data from various sources. Data analysis and correction with the help of AI (artificial intelligence ) and ML ( machine learning) to simplify the data decisioning for SMEs.In depth analysis with quality insights, embedded fraud checks and controls for risk mitigation helps in reducing the TAT for loans by 95% with lesser errors and lower costs. These financial technology platforms help define a risk based regulatory framework that encourages responsible innovation and aligns with the core mandate of maintaining financial stability.
With the help of the underwriting services provided by new age fintechs ,the solutions are customized for data aggregation and analytics which aids real time decisioning for SMEs. Getting access to funds is simplified as they have the freedom to choose the type of financing needed as these lenders offer tailor made SME loans.
All of this will help the SMEs in improving their product quality as well as offer customers a seamless experience to make them at par and competitive in the global and national markets.
The author, Gaurav Anand, is CEO and Co-Founder at Namaste Credit. The views expressed are personal
First Published: Aug 14, 2021 6:01 PM IST
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