Banking solutions to empower SMEs in post-COVID recovery

Financial infrastructure provider Banking Circle recently commissioned research into the challenges facing SMEs in accessing financial services.  And it seems clear that, even before government-enforced lockdowns plunged SMEs into financial uncertainty, a quarter of smaller merchants had borrowed funds to pay salaries or business costs. Miranda McLean discusses the implications of these findings and how financial institutions can step in to help fill the gap.

We have always carried out regular industry studies to uncover current pain points and gaps in the market. In March 2020, we carried out a Europe-wide survey involving more than 1,500 SME online merchants and found that nearly two thirds (64.6%) have needed extra finance in the past two years. 

And that was before any borrowing to underpin business during the COVID-19 crisis. Nearly a quarter (23%) needed the additional funding to cover payroll, and a further 26.5% to cover regular business costs.

Although obtaining extra funding is a fact of life for many businesses, our research highlights the serious gap in how easily and quickly funding can be obtained. This gap will have an even greater impact in the current climate as well as in the coming months or years of post-COVID recovery.

A quarter (26.4%) of respondents felt that without access to new cash they would be forced to let employees go, and almost as many (24.4%) believe their business would ultimately fail if they were unable to access new finance. Yet the same number of businesses had to wait between three and four weeks to receive the vital cash they needed to cover essential costs.

Businesses of all sizes are currently facing a whole new set of pressures, but the strain is felt most keenly by smaller businesses. The Banking Circle white paper, ‘Mind the Gap: How payments providers can fill a banking gap for online merchants, highlights the continued issue of financial exclusion for SMEs – and the opportunities for payments providers. These organisations are already connected to online merchants and are perfectly placed to play a crucial role in providing wider banking services, as well as access to funding.

What’s changed since 2018?

Our latest study was conducted as an update and expansion of a 2018 survey of SME online merchants, to give an insight into how the market and access to funding has changed for SMEs in the past two years. In 2018, the study included only UK businesses, but comparisons in UK results from both studies reveal some interesting insights – especially in the dramatic change in reasons for borrowing.

In 2018, 9.2% of UK SME merchants surveyed had borrowed funds to cover payroll and 9.9% to cover business costs. Two years later, 23.5% needed additional funding to keep paying staff, and 32.8% would have been unable to pay business costs without external financing.

The implications of any inability to gain this additional funding could be disastrous for a small business. In 2018, merchants in the UK said they would have to let employees go (24.6%), and the business could fail (13.3%) without funding. In 2020 these scenarios were even more likely, with 28.7% of UK SMEs saying they would have to make redundancies and 21.5% fearing the business would fail.

And remember, this is strictly excluding any borrowing required as a result of the COVID-19 crisis, so the challenges faced by small businesses will have increased still further between the survey and the time of writing.

Payment providers breaking down barriers

The world of digital commerce is a rapidly growing sector; but it is also a sector where entrants face multiple barriers to operate because established financial institutions have a fear of the unknown. Opening a bank account is fundamental for most enterprises but can feel like taking an exam. And access to short-term funding, whether to fill a cashflow gap or to underpin growth plans, can involve hurdles too steep for smaller businesses to get over.

However, payments providers already supporting the online merchant space can deliver a genuine added value by providing their merchant customers with banking services including access to funding.

In the current climate that support is going to be more valuable than ever. Indeed, for payments providers that demonstrate a real understanding of SME needs there could be a significant long-term gain.

Miranda McLean is Senior Director and Global Head of Marketing at Banking Circle.

The views and opinions expressed in this Viewpoint article are solely those of the author(s) and does not reflect the views and opinions of Fintech Bulletin.