Earlier this month, the Federal Reserve Bank of Cleveland released research suggesting that SMB lending had more than one thing affecting it. A supply and demand problem.
Policy Analyst Anne Marie Wiersh and Professor Scott Shane summed it up in the following paragraph:
“Since the Great Recession, bank lending to small businesses has fallen significantly, and policymakers have become concerned that these businesses are not getting the credit they need. Many reasons have been suggested for the decline. Our analysis shows that it has multiple sources, which means that trying to address any single factor may be ineffective or make matters worse. Any intervention should take all of the many causes of the decline in small business lending into consideration.”
The Top 3
- SMBs are less creditworthy. Whether it’s because of lower credit scores, less collateral partly due to house prices, or a widening information gap, SMB loans are seen as riskier than other lending classes.
- Businesses just don’t want to borrow Uncertainty, softer sales, increasing costs, whatever the case, SMBs don’t seem to be in a growth frame of mind. And other than businesses who need to borrow to fund cash gaps, growth drives borrowing.
- Lending criteria has toughened. More regulatory scrutiny, lack of information and relative profitability of lending to bigger businesses all contribute to banks tightening SMB lending.
Talking to and observing the actions of SMBs and lenders, I reached the same conclusions. Last year.
So What Can We Do?
Help businesses grow. To be fair, most governments today make this a priority. In the US, the SBA and its network of SBDCs are champions for small business. Other government multi agency programs such as Business USA also help US SMBs and exporters. Across the Atlantic in the UK, the government is also taking SMB finances seriously through loan subsidies and outreach programs.
Accountants are also rolling up their sleeves, with AICPA, ACCA and ICAEW all talking about SMB finances.
Increase visibility. Businesses need a handle on their internal cashflow. Even SMBs with dedicated finance people spend a lot of time managing invoicing, receivables, payables and cash. This is before the added burden of compiling a business case for a loan. Without visibility into their cash positions and the impact of simple payable and receivable juggling on cashflow, many business owners find it difficult to fund new orders and growth. Cashflow Add-on’s that connect to cloud accounting applications such as QuickBooks and Xero focus on simplifying daily cash and collections for SMBs.
e-Invoicing is slowly gaining traction and the US Treasury leads the charge in driving public sector adoption in the USA. Corporations that have invested in accounts payable and invoicing technology are trying to drive up e-invoice adoption by their suppliers. Across the Atlantic in the UK, the UK National e-Invoicing Forum which includes major e-invoice service providers and the government is working with the public and private sector to promote e-invoice adoption.
Simplify borrowing. Businesses complain about the hurdles they have to jump through to borrow from a bank. e-Financing through peer to peer lenders, online auctions, loan portals and supplier financing portals all look to make borrowing easier, albeit in different ways. With everyone constantly reminding banks they aren’t lending, non-bank lending is becoming fashionable. Some new sources are here to stay. Others may fade away as default rates and lending margins do their dance. Asset finance, crowdfunding, loan portals, auctions, merchant advances and e-financing in general will continue to simplify borrowing for SMBs. Over time, more institutional funds will use better SMB data to dip their toes in direct SMB lending, increasing exposure into these channels. In the short term, I think we can expect more portals and sites to pop up and more resources devoted to education and promotion.
And while non-banks continue to innovate, banks are slowly improving the way they service customers, in some cases, using the same technology and approach that was created to disrupt them.
We keep chipping away
The good news is that SMB cashflow is increasingly becoming a priority for everyone. And the innovation in all aspects of this continues. The question remains, how quickly these ‘fixes’ can make an impact and what can be done to increase momentum across the board.