Richard Morgans, General Manager at Mambu, UK & Ireland

SMEs make up 90% of businesses worldwide and employ over half of the global workforce. It’s safe to say that these, often overlooked, businesses are the backbone of the global economy. 

Mambu’s report, titled ‘Small businesses, big growth” found that SME growth accelerated during the pandemic, with 15% starting to trade after their owners were put on furlough, or made redundant, due to COVID-19.

This sudden boom in ‘Covidpreneurs’ has resulted in heightened demand for financial services in this area which, if left unaddressed, represents a huge missed opportunity for lenders. 

The struggles of being an SME

Yet despite this growth, and the contribution SMEs make to the economy, small business owners are struggling to get the support they need.

For Mambu’s Disruption Diaries report, we spoke to 1,000 SME owners around the world who had set up their company and applied for a business loan in the last five years. We found that 58% of UK SMEs had not been able to secure any, or sufficient, funding to cover the needs of their business on at least one occasion.

Issues securing traditional funding mean SMEs are relying heavily on personal networks to drive their growth. In the UK, the top source of funding for SMEs launched in the last five years is through friends and family, with one in two (46%) of the SMEs we surveyed acquiring investment this way. 

Although such investment is often much more favourable to SMEs, in relation to interest rates, financial checks and repayment terms, it’s a problem for the wider economy. If wealthy personal networks have become a requirement for successful SMEs, then we’re shutting out large swathes of entrepreneurs who don’t have access to such networks and blocking innovation.

Barriers to securing funding

So, what are the issues SMEs face when trying to secure funding?

Our report found that the greatest barriers to funding for UK SMEs are cash flow not being considered strong enough (29%), slow lending speeds (25%), not enough starting capital (24%) and rigid lending criteria (24%).

And when UK SMEs failed to secure sufficient funding due to such barriers, over a third (35%) were struck with cash flow issues, 27% were unable to upgrade or improve their technology, a quarter (26%) were unable to scale and a further 26% couldn’t launch new products or services.

It’s clear that the way banks and lenders have traditionally handled SME lending is no longer fit for purpose. And it’s holding entrepreneurs – and the economy – back. If banks want to strengthen the economy and fuel innovation then they need to transform the ways they offer SME funding.

Shaking up SME lending offers short-term benefits for banks and lenders too. Our report found that 93% of UK SMEs would consider switching lenders if a competitor offered a better or improved offering. The lenders that can create the offerings SMEs are seeking will see a surge in new customers.

The future of SME lending

It’s not only better loan conditions but the speed and user experience that are important to SMEs.

When UK SMEs are looking for lenders, their top three considerations are long-term repayment plans (74%), low-interest rates (70%) and a short application process (70%).

And when it comes to the application process, SMEs are most interested in banks offering flexible loan conditions (75%), tailored offers and services (67%), and faster loan decision processing (66%).

Digital tools will also tempt SMEs away from competitors. Well over a third (38%) of UK SMEs would switch lenders for better digital services, with 45% switching for better borrowing benefits and incentives as well as better financial options.

SMEs’ desire for digitalisation is good news for alternative lenders and an imperative for traditional banks. Alternative lenders have the upper hand when it comes to digitalisation as it typically forms a core part of their identity. If banks want to avoid losing SME custom to such challengers, they need to prioritise their own digital transformation.

Final thoughts 

SME lending is big business and isn’t an opportunity to be missed. Lenders should be taking note of what SMEs are looking for in a financial institution, as well as how they can best meet these needs. Whether that be through more digital services, a speedier application process or more tailored offerings. 

SMEs no longer want to be an afterthought. And, if financial institutions don’t recognise their unique needs, they won’t hesitate to look for funding elsewhere.