It’s a situation that’s only got worse post-COVID. Under half of SMEs were successful in applying for finance since the pandemic, compared with 64% before.

What’s creating the credit gap?

It’s a classic case of conflict between two approaches. On the one hand, traditional lenders have stringent lending requirements, a risk-based approach that requires significant collateral and minimal debt, and legacy systems that struggle to keep pace with the realities of digital markets.

On the other hand, SMEs need quick access to funding with applications that align with their workflows. Many deploy digital native business models so they can appear asset-light, while others may still be repaying COVID recovery schemes, affecting their ratings.

All these elements combine to create a credit gap between what many lenders are prepared to offer and what SMEs need.

This isn’t about SMEs not getting what they want: restricted funding hampers businesses’ ability to scale. With SMEs making up 61% of employment and 53% of the turnover of the UK’s private sector, not being able to grow and invest directly impacts the country’s economy.

But one person’s obstacle is another’s opportunity. Helping bridge the funding gap is the ever-expanding fintech sector.

They’re doing this by offering flexible funding options that cater to diverse business needs. They deliver tailored support via products and services based on revenue-based finance, asset-based lending, and growth loans, allowing SMEs to secure capital based on projected income and inventory. And they’re doing it quickly, allowing businesses to access funds, invest strategically, and adapt rapidly to evolving markets.

Helping SMEs access credit

The three main ways in which fintechs help SMEs to access credit are:

1. Accessibility: digital-only fintechs are less likely to require SMEs to present themselves in person or on the phone as part of applications. Instead, businesses can apply wherever they want, on their timescales, using innovations such as open banking to share evidence rapidly
2. Speed: this ease of access supports the speed SMEs need to capitalise on new opportunities. In addition to intuitive application processes, fintechs are set up to move quickly. Unencumbered by legacy systems or thinking, they can use vast data pools to make decisions and transfer funds rapidly
3. Alternative data: those data volumes combine both traditional banking data and alternative sources to build a more accurate picture of a business’ creditworthiness. This means that fintechs can and do review all aspects of an application and support those that don’t fit within a set of narrow risk assessments

And they use digital technologies to power their approaches. These include artificial intelligence-based risk assessment, alternative credit scoring models, and embedded finance, which make funding more accessible and tailored to business performance. These allow fintechs to assess real-time data and offer flexible options for each company’s needs.

Offering tailored credit

This creates an environment where fintechs use accurate data and analytics to make lending decisions based on business performance. For instance, a fintech might use real-time data to tailor credit lines that match each founder’s cash flow needs and growth plans. This data-driven approach improves risk assessment and offers valuable insights, helping founders make informed decisions to fuel sustainable growth.

But there’s one other thing that sets fintechs apart from traditional lenders and makes them well-suited to help close the SME credit gap: their ability to offer services that meet the requirements of individual businesses. Conventional lenders are often restricted by internal processes, systems and compliance requirements that prioritise those applications with a low risk profile; particularly when part of huge banks, the opportunity for making unconventional decisions is often very limited.

Fintechs, on the other hand, very often aren’t restricted by what different parts of their organisations are doing. Many will only offer one specific service or target a certain type of business, so their risk appetite is more closely aligned with their audiences. This means they can tailor their approaches, respond to the specific needs of potential customers, and do so at scale.

Smaller businesses will always need access to funding; for most, it’s the only way to break down the barriers that stop them from competing with larger competitors. SMEs won’t ever become the next major player if they aren’t supported. They need partners aligned to their ways of operating as they look to grow and scale rapidly. The UK fintech sector is growing rapidly, fuelled by companies that can help plug the credit gap for SMEs and support their ambitions with access to funding that meets their specific needs.

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