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how is digital lending transforming the sme landscape

Fast Loans for Fast Times

By combining financial know-how with technology, fintechs have the potential to transform the fortunes of many small and medium-sized enterprises (SMEs) by approving loans more quickly, and giving more SMEs access to the funds they need to expand.


The Disproportion

SMEs represent a significant part of the global economy, accounting for nearly 90% of all modern businesses, and contributing significantly to the creation of jobs and to economic growth. The European Union is home to 24 million small and medium-sized enterprises, representing about 99.8% of all companies and employing 93 million people that account for two-thirds of total employment. According to the US Small Business Administration, SMEs make a vast majority of US companies as well, a total of 99.7 percent. SMEs are the backbone of most economies, keeping them functioning and developing an entrepreneurial spirit. 

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Globally, FinTech adoption among SMEs is 25%. In the UK, more specifically, the adoption is at 18%, which leaves room for growth. According to EY, one reason to expect a rise in the adoption of FinTech by SMEs is their willingness to share data through open application program interfaces (APIs). Open APIs make it easier for FinTech challengers to build applications that are tailored towards SMEs' unique financial needs.

Source: EY

However, despite their essential role, SMEs receive a disproportionately small share of credit from the financial system, a trend that persists across developed and developing countries. It is estimated that 40% of SMEs globally have an unmet financial need, and according to the CGAP report, the global opportunity for SME credit is estimated to be around $8 trillion

SMEs are often associated with higher risks, sizable transaction costs, and a lack of collateral. Obtaining a loan for a SME is often a burdensome process, with a low level of transparency, and high costs associated with searching for a loan. Traditional lending simply isn’t cut out for the needs of a small business. So, this is where digital lending comes to the rescue.

What Is Actually Digital Lending?

Digital loans are often small, short-term loans provided by fintech lending companies to persons or businesses in need of fast access to capital. The whole lending process is digitized and performed remotely, frequently through the mobile phone. That’s why they are sometimes also called mobile loans.  

Digital lenders use various online channels and tools to engage new and existing customers, feeding their digitized data, such as bank statements, e-commerce transactions or mobile money payments, into algorithms and analyzing it to predict willingness and capacity to repay a loan. After the approval, loans are disbursed and collected remotely, again through digital channels, such as bank accounts, e-commerce accounts, or mobile wallets. 

How Is Digital Lending Helping SMEs?

Digital lending has made the lending processes quick and easy for SMEs by using bots and specifically designed algorithms to gather all the relevant information from private and public sources facilitating minimum paperwork. 

Application assessments are quick and extremely accurate and unbiased, due to a minimal need for human intervention. This allows lenders to offer loans at lower interest rates without any guarantor or collateral. 

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And finally, as digital lending makes strong use of technology, the safety of financial information and sensitive details is not compromised. In short, with lower interest rates, uncompromised security and quick access to funds, digital lending is helping SMEs expand and ultimately thrive.

The Future of SME Lending

Small businesses have unique needs and demands that can become more complex as a small business grows. Those needs aren’t being addressed by the traditional forms of lending and banking, however technology advancements are allowing better SME financing options to come forward. 

Where previously SMEs were left waiting for financial support during testing times, they can now access the funds needed within the day, helping them flourish even when unforeseen difficulties crop up.

As competition has increased and technology advances, some banks are already redeveloping their products and offerings to help small businesses in order to keep their share in the market.