SMB’s play such a significant role across economies, and to quote the World Bank “formal SMEs contribute up to 60% of total employment and up to 40% of national income (GDP) in emerging economies.” The below factors are critical to the success of SMB’S:
Access to Market
E-commerce and digital payments have opened up access to market like never before and really small-scale players have been able to do digital business, with minimal investments. The question is, are SMB’s aware of all their options, and are there companies or forums that help them quickly without them having to undergo pain of investing in technologies or making major technology investment for something that can be done at a minimum cost. This is where we believe FinTech’s have a really large role to play.
Availability of Capital
With respect to access to capital, banks and finance companies are recorded with increasing NPA and are looking to expand their assets through diversified lending. Banks are struggling with documentations and paper work, collateral requirement for loans, high interest rates and long decision cycle.
SMB’s struggle with either lack of plans like financial projections, extensive project plans, etc. or get intimidated with the cumbersome processes which banks demand. FinTechplayers come into the picture here, by providing templates for plans, documentation and inviting onboarding offers thus taking care of both the aspects mentioned above.
Collaterals for loans & Interest rates
FinTech’s are constantly investing in building technology infrastructures with financial models, credit assessments and risk score tools by combining extensive data modeling and latest technologies, for e.g. machine learning for India Inc. They are able to easily extend this to the SMB context, and they are able to provide the confidence on credit worthiness. FinTech’s help bring in transparency, bring down the risk through more in-depth analysis of the business which banks themselves may not be in a position to do. This in turn brings down the risk premium or the interest.
A combination of regulatory push mandating quick decisions on loan sanctions, and technological advancements that enable digital KYC check, credit appraisal and onboarding of a borrower has meant that the decision cycle has already shrunk over the last 3 years. Going forward, no good SMB will have to wait forever for a loan as they would have multiple lenders options to choose from driven recommendations given by FinTech players.
FinTech has beautifully connected markets and capital and has created magic by providing a plethora of options (lenders) to such businesses, and by assisting the lenders in credit appraisal of unknown small businesses with the help of their extensive knowledge and data on these businesses. This explains the proliferation of supply chain finance programs started by e-commerce companies like Flipkart and Amazon, who onboard SMEs onto their platforms, thus ensuring mutual trust between the buyers and the sellers.