Over the past few years the world of consumer finance has been transformed, with more options than ever. But this development has been somewhat slower when it comes to business offerings – particularly for SMEs.
This is what Katrin Herrling – a dairy farmer who also happened to work in finance with some of the world’s biggest banks – found when her bank in Ireland increased rates for her business due to the 2008 crash and she was left with no alternatives and very little choice.
“If anyone should have known what to do it should have been me, because I was sitting in global banks talking to executives about how to rebuild their commercial lending function,” Herrling recalls. “I had all these high level discussions but I had no idea where I was going to take my own business. We decided there must be a better way.”
The answer? Liberating data and using it to help businesses understand their options, so they could gain funding from a variety of sources and choose the most suitable one for them. Funding Xchange leverages data to create a marketplace for all the funding options available to small businesses and helps them make an informed decision on what’s best to them. It’s free, transparent, unbiased and – perhaps most importantly – simple.
“We are passionate about transparency in the marketplace,” says Herrling, adding that this is something small businesses are increasingly realising they deserve. Consumers expect instant transparency on all offers available to them, and businesses are now starting to expect the same. Previously, banks dominated the market due to the data they were sitting on, but open banking has put paid to this advantage. “Over the past three years banks have had to share data and businesses are taking ownership whether it’s management accounts, current accounts or even transactional data from merchant acquirers,” says Herrling.
A key reason SMEs have been underserved is the size of the segment – “there are 80mn consumers but fewer than five million business customers”, as Herrling explains. In addition, a consumer credit score is a lot simpler to understand than the nuances of a small business balance sheet. Banks could end up spending a lot of time and money approving a loan with a relatively low return. “In order to transform, you need to automate this process,” Herrling comments – and that’s exactly what Funding Xchange does, by providing live data on a digital platform and structuring applications so the process isn’t just easier for the SME, but for the lender.
As the SME finance landscape begins to change, more competition has come in for traditional lenders. “In the last two years we’ve seen digital challengers come in and go after the lower end of the market,” comments Herrling. “You’ve seen the likes of Iwoca coming in from a lending side and Tide coming in from a business current account side. These guys are going after segments that can be profitable – they’re bringing in digital models to remove cost and create a much better customer experience.”
A ‘better’ experience these days inevitably involves self-serve. “People are no longer willing to wait six weeks for an appointment with their branch managers – small businesses have orders to fulfil and employees to pay, six weeks is ages! You can go online and get instant gratification as a consumer, and you expect that as a small business.”
Aside from increasing demands from SMEs, regulation has been a transformative factor in the finance environment. The SME Act now means when a bank declines an SME finance it must offer to refer the business to alternative platforms, which has given rise to interesting information about how many SMEs are declined. Risk aversion has meant the quality of customers being declined by banks has improved, meaning more customers are turning to alternative solutions and could prove lucrative for challengers.
In addition, providing options for these companies has been a key priority for government, with the British Business Bank working with over 120 partners to unlock finance for SMEs. “In the last economic crisis there weren’t enough solutions available, now there are almost too many options,” says Herrling. “We need to investigate these options and help SMEs find out what’s right for them.” A diverse, vibrant landscape, the CEO believes, will make the UK more resilient in the face of another downturn.
Moving forward, Funding Xchange will continue to provide data and insights around alternative finance options, but also recognises small businesses need support, not just capital. “We’re interested in providing a digital tool that helps businesses access finance and understand how to build financial resilience,” says Herrling. “We work with partners like Experian to help businesses understand what pragmatic steps they can take to be able to access better funding sources.”
The powerful data Funding Xchange has access to can help businesses learn and improve and the company will continue to partner with banks and credit agencies to empower smaller businesses. “We are helping businesses on a journey – that’s what gets me excited,” says Herrling. “I founded a business; it’s a hard journey and sometimes you need to be able to speak to someone, understand and ask questions.” Funding Xchange takes away the cost and time involved in gaining insights, allowing entrepreneurs to focus on what’s really important – growing their business. “It’s our obligation to engage with them in a way they understand so they can make decisions for themselves,” Herrling adds.
You can read more about Funding Xchange on its microsite.