Open Banking and the endemic funding problem currently facing SMEs

Open Banking and the endemic funding problem currently facing SMEs

SMEs and the funding gap.

One of the biggest problems facing SMEs today is the lack of consistent and contextualised funding options for small businesses. Many SMEs and sole traders find themselves grinding to a complete stop in their development due to cash flow and funding issues.

These problems can take the form of employee payroll issues, extended credit periods and a lack of funds for expansion or product development (Desai, 2020). SMEs and their owners are wary of lending from banks, due to the tedious and lengthy auditing and accreditation processes required when applying for small business loans. Combining this with financial products that lack an intimate knowledge of these respective companies, it can only be said that the way funding/loans are structured is outdated. Businesses fail due to the gap between accessible funding and their financial obligations.

Funding represents a business’s ability to be flexible and adjustable. Without access to proper financial resources, SMEs can find themselves behind the curve. Financial security provides firms with room to problem solve in creative and experimental ways, often leading to new and innovative methods of business. To level the playing field between smaller firms and larger, more well established businesses, open-banking offers SMEs the chance to have personalised, responsible funding for their company (Kearney, 2021).

One of the main problems surrounding funding for small businesses is that companies are not aware of the funding options available to them. Anil Stoker, CEO and Co-Founder of funding solution MarketFinance has addressed this, saying:

“Just 44% of SMEs use some form of business finance. Almost the same percentage (43%) don’t want to apply for funding at all because of the lengthy processes they expect from traditional sources. It’s something I hear regularly from our customers who were frustrated by delays and sought out alternative finance to find a quicker solution.

Fintech business lenders like MarketFinance take the friction out of these processes through smart technology and help from real people at every stage. So business owners can get the working capital, as well as the time, they need to come up with innovative ideas, scale their operations and move forward.”

Open Banking Tools and Liquidity

1 in 4 SMEs report that they have missed out on a business opportunity in the past year due to a lack of funding (TC Group Accountants, 2021). Improving small business access to loans with terms beneficial to both the lender and the SME is vital to the growth of the industry in the UK. Cash flow issues arise for small businesses all the time and they are often the downfall of SMEs. The inability to pay creditors, employees and investors will damage a business far more than the inability to sell a product. Revenue collection and the speed at which companies can collect payment from customers affects SMEs far more than larger businesses. Eliminating the time between payment and collection of money can help ease cash flow issues that affect companies. Improving liquidity will go a long way to improving the financial health of these companies.

Solutions like tomato pay and other open banking solutions work towards cutting down on the time that companies spend receiving payment, to improve cash flow and prevent financial blockages. Businesses using tomato pay get paid quicker, allowing them to use their liquidity. Liquidity is the name of the game when it comes to small business, as companies with the most liquidity are the most maneuverable. Liquidity without financial analytics will only lead to poor decision making, wasting whatever advantage may have been accrued. tomato pay and partners such as FundingXchange want to ease the headache of acquiring a loan through smart and personalised funding options, tailored to each individual business based on their unique financial profile. Through data collection, tomato pay operates what can be described as a running audit of a company’s financial health. From there, tomato pay identifies issues that need solving and helps to connect SMEs with smart lending solutions that can impact their business.

In response to the Global Pandemic, SMEs have moved towards open banking solutions more and more, to maintain control over their finances (Lenney, 2021). To close the SME funding gap, open banking platforms like tomato pay aim to use the growth of API and machine learning technology to optimise and personalise funding opportunities. Drawing from many data sources, tomato pay as a platform is very much indicative of the direction in which banking is heading. Fintech solutions aim to optimise traditional banking processes such as lending, rather than replace them. A mix of alternative finance and fintech financing solutions represent the way forward for SMEs, allowing them to build liquidity and further expand their funding (Li, 2021).

FundingXchange is a fintech intermediary and provider of technology solutions into banks and lenders that facilitates small businesses connecting with the right funding that is best suited to their business context. With regards to the SME funding gap, Co-Founder and CEO of Funding Xchange, Katrin Herrling commented:

‘Providing multiple funding options for SMEs is a critical step in tackling the funding gap. A variety of options not only increases conversion on lending products for the lenders involved, but it also gives SMEs the flexibility they need to find the right product for their business at the right time.”

Cashflow management and revenue collection are at the core of a business’s financial health. Without effective tools to handle the speedy collection of money into a business, many firms can lose sight of their accounting. Systems like tomato pay and its partners work to address these issues in SMEs, providing small businesses with effective and understandable cash flow management and revenue collection software. With the growth of fintech and its adoption in business, integrated financial platforms like tomato pay will become the norm rather than the exception. The early adoption of such technology will give small businesses a significant advantage over their competitors. The further integrated these systems are into the everyday lives of SMEs, the easier it will be to provide tailored and personalised financial services.