12 Nov A paradigm shift in small business finance
Small and medium sized enterprises (SMEs) are a major, yet often overlooked driver of the world economy. They account for more than half of the world’s gross domestic product (GDP) and employ almost two-thirds of the global work force. However, around the globe, SMEs often have one major pain point - dealing with their finances and ensuring appropriate funding. As reported by the international Financial Corporation (IFC), a “funding gap” of more than $2 trillion exists for small businesses in emerging markets alone.
Reasons for this issue are manifold: the finances of SMEs are characterized by high complexity, yet are low scale. For traditional lenders such as banks, extending credit to small business is often too costly, given the small loan size. Driven further by regulation, banks have reduced their exposure to smaller businesses in recent years. Internally, small businesses often lack the skills and resources to handle finance in a sophisticated manner and to conduct systematic fundraising.
Acknowledging the importance of small businesses, governments, state agencies and internationl organizations have made many attempts to improve the situation. Measures include government guarantees, direct government lending, supporting SME banks or driving the implementation of credit bureaus. While some of those efforts have shown positive results, a vast funding gap still remains.
In recent years, Fintech - a contraction of “finance” and “technology”, and defined as the use of technology and innovative business models in financial services - has become a powerful trend. From 2013 to 2014, equity investment into Fintech companies has quadrupled from $4 billion to more than $12 billion.
This trend has the potential to become a game changer for small businesses. Because FinTech solutions are efficient and effective at lower scale, small businesses will be one of the main beneficiaries of FinTech’s disruptive power.
FinTech embodies a new set of products tailored to the needs of small businesses. These include marketplace (“peer-to-peer”) lending, merchant and e-commerce finance, invoice finance, online supply chain finance and online trade finance.
No Comments