Cash flow has always been a big challenge for small businesses, but right now it has reached critical mass. The economic impact of the ongoing pandemic has devastated millions of SMEs – and while government help is being established in many countries, it won’t come fast enough to save every firm.
We’ve never seen circumstances like this before, so we can’t assume that existing funding options can solve the problem. To support SMEs through the coronavirus crisis, we need to consider innovative new routes to providing business capital, which are being developed by the fintech industry.
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Coronavirus has put an existing issue under the microscope
Even before COVID-19 wreaked havoc on small businesses, securing the finance needed to grow a company wasn’t easy – and the problem can be traced back to the 2008 financial crisis. Tighter regulatory controls imposed by governments after this period led to more complex procedures and higher costs for mainstream banks. The cash-strapped balance sheet of SMEs, with little capital to buffer, makes them less appealing in this process, so it’s hard for most small businesses to secure a loan via traditional routes.
While one SME failing to get a bank loan might seem like a small problem, when you look at the combined value of these companies, it becomes a major issue. Small businesses are the backbone of the global economy; they account for 95% of companies in OECD (Organisation for Economic Co-operation and Development) regions alone.
These firms are huge employers and revenue generators, so ensuring their survival is of critical importance. And emerging financial technology providers don’t have the compliance ‘baggage’ that big banks are carrying around to slow them down.
Mainstream support can't come quick enough
Even for businesses that meet bank loan criteria, it's not a quick win. Paperwork is long-winded, and finance often can’t be released without involving a number of third-party intermediaries, multiple back and forth checks, and long-term projections based on an understanding of the next 12 months of income statements. Raising capital takes time; time that SMEs don’t have in a global economic crisis.
Fintech can change the game here, because the industry is already looking at ways to address these fundamental problems, in order to make access to finance quicker, cheaper and easier to navigate for SMEs.
The alternative lending and investment market is on a growth trajectory, expected to surpass $35 billion by 2024. Over half of small businesses are already aware of options like peer-to-peer lending, and innovative new fintech platforms are focused on creating direct loan opportunities between SMEs and investors, so companies can get cash quicker and access alternative investors.
The role of investors is vital to this equation, as they usually move faster than traditional financial institutions – sometimes with a higher risk appetite, and a more focused view of potential returns in the current economic landscape.
A faster, cheaper route to urgently-needed finance
Fintech is able to speed up access to capital by using cutting-edge technology to streamline the financing process. Leading providers are creating solutions that cut out the middlemen who slow down traditional loan and investment applications, reducing both the time and cost involved in securing funding.
Blockchain is one of the most powerful tools in this area, as it digitises many of the aspects that have previously required complex back-end actions or third-party intervention. Alternative business finance platforms built on the blockchain can validate transactions immediately, for speedier contract exchange and cash clearing. Additionally, the use of blockchain reduces the counterparty and settlement risk between companies and investors.
While the old legacy banking and mainframe system requires lengthy housekeeping and settlement routines between tends and hundreds of individual databases, modern financial technology has shrunk the process down to just a few modern systems.
The challenge for technology providers in the COVID-19 climate is to ensure that speed and security can be delivered at scale. Many fintechs are building their platforms on public general purpose blockchains, which are also processing traffic from data-intensive sectors like gaming and gambling.
The smartest fintech innovators are developing their own financial services blockchains and enterprise systems, with professional grade security and controls. These are specifically tailored to helping SMEs access funding quickly and safely – no matter how many companies are applying.
Taking the pain out of the application process
Another way in which the fintech industry is helping SMEs get easier access to capital is by making the whole process more user-friendly.
In the past few years we’ve seen a shift in the retail banking sector, with consumer-oriented apps and challenger banks taking on the ‘big guns’, purely by talking to customers like real people. The same shift is now occurring in lending and investment, and coronavirus will accelerate the digital change.
Front-line fintechs are creating dashboards and chat robots that make it simple for small businesses to check their rating and credit scores and make applications within minutes. This is a significant improvement the back and forth paper communication it takes mainstream banks days (or even weeks) to process.
More than that, these fintechs are creating a simple, digital process for what happens after funding applications have been made. Investors using their platform have their own online dashboard, through which they can log in, view the latest proposals and select the companies they want to back in real-time, on terms that work for all stakeholders.
This digital, user friendly approach makes funding accessible to business owners, regardless of their financial knowledge. The fintech provider takes care of all admin and compliance requirements, and uses its back-end blockchain infrastructure to ensure funds are transferred to SMEs within days of their initial application – while bank loan paperwork and government funding applications are still stuck in an approval bottleneck.
For greater hope, SMEs need more choices
It would be easy to paint traditional bank loans as inaccessible, government funding offers as inadequate, and fintech alternatives as a knight in shining armour, but this is too black and white. Every SME has its unique set of circumstances, and must choose its own route forward to survive the coronavirus storm.
That being said, there are clearly problems with small businesses getting widespread access to finance quickly, which traditional routes to raising capital are yet to solve. And fintech lending and investment platforms provide a new avenue for frustrated SMEs to explore when established options aren’t delivering results quickly enough.
The best thing the finance industry can give struggling companies right now is choice; a variety of funding routes to fuel hope for recovery and growth. Fintech innovators are launching platforms that provide small businesses with an alternative way to raise capital, where current systems are not stepping up to the plate.
When we look back at this unique and unnerving time in years to come, coronavirus could well prove the catalyst for taking the alternative business finance market mainstream. But more importantly, it could also go down in history as the moment where an innovative, technology-led approach saved thousands of SMEs from going into administration.
Sascha Ragtschaa is CEO of WeOwn
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Sascha Ragtschaa most recently worked as the Regional CIO (Europe, Asia and Africa) for Computershare, a global market leader in transfer agency and share registration, mortgage servicing and other financial services. He is now the CEO for WeOwn, a technology company with a focus to provide new alternative financing methods to the private business sector worldwide.
He started Software Engineering at the age of 16, and worked for a number of web technology start-ups during the initial stages of his career.
Working in streaming and multimedia technologies initially in 2000 he branched out into data analytics and financial services, working as a Lead Engineer on multiple projects and business lines around the world: employee share plans, share registry, annual general meetings and events, shareholder communication and mortgage servicing to name a few.
Over the past 17 years he has worked for the largest global share registry and transfer agency provider in the world (Computershare), and held various technology leadership roles in Europe, Australia and North America. In his most recent function he was the Chief Information Officer for Europe, Middle East, Africa and Asia.
He's now the CEO and Co-Founder of WeOwn. WeOwn gives SMEs better access to funding, so they can focus on growing their business – not securing finance. WeOwn has built an online financial marketplace, powered by blockchain technology, to offer simpler, cheaper finance options with complete capital liquidity, including equity raises and peer-to-peer loans. Today, WeOwn is a fast-growing international game-changer, with an international network of talented developers, building products that help SMEs accelerate business growth.