The ‘Small business, big growth’ report surveyed over 1,000 SME owners globally, who set up their company and applied for a business loan in the last five years. It reveals that reliance on personal networks has increased 11% during the pandemic, with shrinking access to external capital for SMEs.
Despite the boom in new SMEs created in the last two years, access to funding remains a constant roadblock with 32% of these businesses experiencing difficulty securing starting capital, rising to 33% of SMEs launching soon.
Nearly half (43%) of SMEs had to rely on friends and family for loans overall, with this figure rising to 47% among businesses launched since March 2020 and 48% of those launching soon. Of the SMEs unable to secure sufficient funding, 34% experienced cash flow issues, 33% were unable to launch new products or services and 30% were unable to hire effectively - a major impact amid the ‘Great Resignation’.
For larger SMEs, with 101-250 employees, being unable to access funding has curtailed their ability to hire (40%), scale-up (36%) or pay for upgrades or improvements (36%).
Mambu’s findings come amid a rise in alternative lending, as SMEs turn to challenger banks and fintechs to overcome common barriers. The opportunity for new entrants is clear as the vast majority (92%) of SMEs say they are open to changing lenders for different or simpler digital support.
Nearly half (49%) of SMEs cite better borrowing benefits and incentives as the top reason to change lenders. Meanwhile, 47% would switch for better financial options and 35% for improved digital services.
Demand for more digital options appears to be directly related to the pandemic. Two thirds (66%) of both SMEs that launched after March 2020 and those set to launch in the near future said that digital services are an important lending consideration, versus just 53% of businesses that launched before this date.
Eugene Danilkis, CEO at Mambu, said: “SMEs are the lifeblood of the global economy and responsible for driving growth, job creation and the post-pandemic recovery. But they are facing big challenges. Access to external funding has become difficult during the pandemic amid record demand for financing and increased friction in the lending process. It’s no surprise SMEs are ready to jump ship for better, more accessible services. If lenders want to stand out, they must transform and modernise their financial experiences to ensure SME success; this includes faster onboarding and loan decisions, harnessing the power of the cloud and offering mobile and digital-first products.”
Financial institutions must do more to tackle challenging application processes for loans. The research found that the length it takes to apply for a loan is a major influence on SMEs when choosing a lender.
A short application process was cited among the top three most important considerations when trying to secure external financing by more than three quarters (76%) of global SMEs, tied with long-term repayment terms (76%) and narrowly behind low-interest rates (81%).
When it comes to improving the application process, the majority of SMEs reported interest in faster loan decision processing (79%), more flexible loan conditions (78%), tailored offers and services (76%), and low or no collateral requirements (75%).
Richard Lim, CEO of Retail Economics, said: “The pandemic has ushered in enormous changes in how we work, play and shop, accelerating the democratisation of digital and with its repercussions still reverberating across society. But access to capital is an area where digitisation has matured at a much slower place. All too often, businesses looking to scale quickly and seize opportunities are choked by exhausting application processes. Stifled by slow and inefficient practices, current lending practices are no longer fit-for-purpose in today’s fast paced, digital world.”
The most common barriers to securing funding among SMEs are not enough starting capital (30%), too much paperwork and admin in the lending process (28%) and cash flow not being considered strong enough (27%).