How Fintech is Transforming SME Financing?

Small and medium-sized enterprises (SMEs) play a crucial role in the global economy by generating employment and innovation. Empowering them to adapt and thrive in this competitive market space is essential for building global economic growth, addressing diverse range of social needs, tackling climate change and conserving environmental resources. According to the World Bank, SMEs represent about 90% of businesses and more than 50% of employment worldwide. In fact, formal SMEs contribute up to 40% of national income in emerging economies. However, increasing complexity of regulations, public policies, evolving customer behaviour and supply chain constraints have put pressure on SMEs to build a sustainable growth strategy. The recent economic downturn followed by the global financial crisis have created a challenging landscape for SMEs to grow. A 2019 report by CB Insights have shed light on the financial challenges faced by small and medium-sized businesses in the United States.

  • 44% of employer firms said credit availability or securing funds for expansion was a financial challenge in the prior 12 months

  • 60% of applicants received less financing than the amount they applied for

  • Small business owners risk personal well-being to raise capital

Securing appropriate funding and dealing with finances have always been a major pain point of small and medium enterprises. Traditional financial service providers often focus on large corporates while SMEs remain as the underserved sector. Post-financial crisis market environment and changes to regulatory frameworks have forced banks to tighten their lending standards, thus reducing their exposure to smaller businesses. Financial technology or Fintech companies have emerged as a game changer in SME space by filling in funding gaps and carving out increased revenues. SMB targeted services rolled out by fintechs range from innovative accounting software to financial management, insurance, credit risk assessment, business valuation and more. Small and medium sized businesses (SMB) can benefit from the disruptive power of Fintech solutions as it helps them in making better business decisions. Here are six ways Fintech companies can help small and medium sized businesses in improving their financial management and goals.

Peer-to-Peer Lending

Also known as “Marketplace lending or Crowdsourcing”, peer-to-peer lending (P2P lending) has been gaining immense popularity in recent years. According to the research findings published by Morgan Stanley, P2P lending companies could raise up to $480 billion in loans by 2020. Driven by technology, modern P2P lending is a business innovation that connect borrowers and lenders directly, making the returns effectively much higher. P2P companies operate online and provide a platform to offer identity verification, loan approval, loan servicing and legal compliances. Since these financial technology companies manage the funds coming in from many disparate sources, it cuts out the middleman and overhead fees, thereby improving the economic efficiency of lending and investments.

The applications of peer-to-peer lending goes beyond personal or commercial loans as the specialty markets include crowd-investing (equity crowdfunding) and peer to peer fundraising. When it comes to SMEs’ highly complex and low scale finance needs, P2P lending offers a better alternative to traditional banking systems. Unsecured lending is the most popular application of fintech services. Small businesses can benefit from such services as it would ensure stable cash flows with no tangible collateral. Moreover, fintech platforms source funds from retail or institutional investors thus bypassing the complicated regulatory framework of traditional banking systems. This new fintech innovation provides a wide array of benefits to lenders and borrowers such as faster approvals and funding, transparency, distributed load, lower risks, security assurance and higher gains.

E-commerce Finance

For SMEs, chasing late payments are always a headache. Late customer payments can have a negative impact on small businesses, as it results in financial difficulties. Enrolling in online payment service and setting up e-commerce platforms can help businesses in tackling this issue. Payment processors and e-commerce platforms offer an interesting value proposition for small businesses. Facilitating better cash flow and generating new revenue streams, fintech payment gateway solutions guarantee fraud protection and personal data protection.

E-commerce sales has been soaring to greater heights in recent years. According to Statista, retail e-commerce sales worldwide amounted to 3.53 trillion US dollars in 2019 and e-retail revenues are projected to grow to 6.54 trillion US dollars in 2022. As the ecommerce sales continue to increase, SMEs need to adapt fintech solutions for multi-currency payment processing,user-friendly experience, increased sales and optimization of business process. Some of the popular payment processing platforms include Amazon, Rakuten, Alibaba, PayPal, Square, Skrill, Stripe, Google Wallet and more.

Invoice and Supply Chain Finance

Small and medium sized businesses often lack the expertise and resources to manage their finances and taxes. However, it is essential to keep track of the operational expenses and working capital to expand their market reach and drive growth. Financial technology companies are introducing innovative solutions tailored to meet the unique needs of small businesses. Integrating an advanced digital accounting tool with your business’s bank accounts makes it easy to track expenses and income. Moreover, connecting the accounting software such as QuickBooks or Xero with invoice finance platform allows SMEs to apply for loans based on the value of individual receivables.

Some of the fintech companies use blockchain technology, artificial intelligence, big data, cloud computing and many other technologies to help small businesses take charge of their cash flow. A fintech supply chain finance (SCF) solution connecting the enterprise resource planning (ERP) system with accounting and invoicing software helps in improving the cash flow with steady, reliable income and increased sales.

Trade Finance

Ecommerce platforms have brought small businesses to a global marketplace. Even though SMEs can trade goods and services across borders more easily than ever, a high degree of friction has remained in processing transactions. Fintech companies have been focusing on addressing this friction in global trade financing by implementing cost-reduction initiatives such as digitization and automation. As FinTech and traditional banking sector collaborates, it breaks down borders and turns it into bits and bytes. With the advent of cryptocurrencies and other borderless financial services, the demand for next-generation international B2B payments are met. SMBs have been investing in fintech solutions to establish and maintain an efficient, stable and sustainable trade finance channel.

Fintech has emerged as a powerful trend in the recent years. Small and medium-sized businesses need to embrace and integrate fintech solutions to transform their performance, stimulate sustainable economic growth and stay afloat in a competitive marketplace.

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