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Solving the catch-22 in small business credit

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The Bank of England has shifted the focus of its funding for lending scheme (FLS) from the mortgage market to SME lending, while the Chinese government has issued a mandate for banks to increase SME lending.

However, credit doesn’t come easily for small and medium businesses that haven’t existed for at least three years, haven’t been profitable, and don’t have assets to set aside as collateral for loans.

SME credit markets need to provide a sustained, reliable flow of credit for fuelling smaller business job generation, entrepreneurship and innovation. 

However, prospects for achieving this depend as much on improving lending processes as on government commitment and SME gumption. Too many small business loans are reviewed using lengthy processes designed for much larger businesses and loan amounts.

What’s the catch?

While SME lending is a growing global priority, unless creditors can make safe decisions quickly and cheaply, the cost of loaning to SMEs can be prohibitively high. 

Loan amounts are often too small for creditors to earn enough to justify a lengthy, costly originations process, but creditors must still make careful decisions because smaller businesses may be riskier than larger ones. 

Also, creditors must comply with regulations for accurately estimating capital risk reserves and treating applicants fairly, which apply to SME financing too.

This creates an awkward “catch-22” — credit grantors will be able to expand access to SME credit in a sustainable way only if they can reduce the time and cost involved in current originations processes, which can’t be justified for smaller amounts of credit.

Most creditors need to adopt or expand their use of decision automation, scoring and other analytics to overcome these hurdles. Using scoring and decision management technology can reduce the time needed to approve SME credit requests from the industry average of two days to as little as 15 minutes – removing many impediments to SME credit expansion.

Currently in some Asian markets, the time it takes to get answers to credit applications is a huge problem for business owners. Entrepreneurial opportunities emerge quickly and require action—often far too quickly for the slowly turning gears of classic bank originations. 

Even in cases where the business has an existing relationship with the bank, a decision can take weeks, as decision processes are rarely set up to facilitate analysis of historical data, especially across accounts.

SMEs are experiencing similar delays and frustrations in markets where credit processes have been largely automated for decades. 

As alternative sources of SME credit rocket, what is the impact for business owners? What are banks doing to try and fight back against innovative finance startups? Keep reading…

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