Jenfi CEO Jeffrey Liu discusses how COVID-19 puts the alternative lending industry to the test as SMEs struggle to access credit to keep the lights on.
By Jeffrey Liu
The COVID-19 pandemic has brought about economic turmoil across the globe. When it comes to funding, SMEs tend to fall behind due to size and a lack of reliability. With the unprecedented uncertainty looming, it is no surprise that SMEs across the region are struggling to keep up with their financing plans, with the longer-term economic impact of COVID-19 yet to be seen. Case in point, up to 90% of Thailand SMEs are expected to suffer extreme revenue loss, while 52% of small businesses are projected for closure should the containment measures last longer.
While almost all industries have taken the brunt of this major economic shock, a study done by Fleishman Hillard suggests that the fintech industry has remained solvent, profitable and experiencing unexpected growth. 66% of respondents also believe that there will be a spike in fintech acquisitions in the year 2021.
For SMEs, financing proves to be the biggest worry as they navigate their way for survival. In a time of economic upheaval, here’s where alternative financing options are being put to the test.
Overcoming lending mismatches
Smaller enterprises have their own set of pain points – access to resources, markets, finance, and training, and it is important to meet these needs end-to-end. Without a visible track record or collateral against which they can borrow, small business owners tend to have trouble attaining funds, especially in fast-growing economies.
In Southeast Asia, where there is a massive credit gap due to a lack of collateral: SMEs are finding themselves with patchy credit histories or no records to present to banks. Underbanked businesses make up a huge market, with an estimated USD 5.2 trillion of unmet financing needs in developing countries yearly – a number that has only grown since the layoffs and shutdowns recently.
There seems to be an urgent need to bridge the gap between these enterprises and accessible financing, even more so when the pandemic aftereffects have put them at the time when they require funding or capital injection the most.
Since the traditional lending model is inclined to ignore the smaller companies, lenders are finding new ways to take it up a notch when it comes to accessible financing for SMEs. This move is receptive, too. Out of 1,200 SMEs across ASEAN, 68% of respondents said that they are open to non-traditional lenders as this gives a faster approval process. This seemed to be a sentiment shared by both established SMEs and newer enterprises.
With fintech advancements on the move, borrowing does not just depend on your credit score or years of a profitable balance sheet. SMEs are given easier access to credit with the data they have on hand and this will help them build and thrive even in tough times.
Faster turnarounds for funding
Initially, many businesses shifted to digital lending platforms due to the surge of loan applications caused by shutdowns and layoffs in the pandemic. However, SMEs require quick and efficient funding – with an ability to disperse funds at a quicker speed than the one banks are able to assist at.
With automated onboarding, quick verifications and set-up of instant bank accounts, new financial institutions are able to provide a seamless process for SMEs who cannot afford the hassle. With growth-focused debt structures and scalable models, they now have the ability to accurately assess a SMEs ability to borrow, evaluate risk more easily, and issue loans within 24 hours or less. This help could be the main catalyst that SMEs struggling in the face of COVID-19 need to survive in the long run.
Financial institutions base their lending decisions on the creditworthiness of a company, and this may be one of the areas that SMEs might not have much to show for, and they end up falling between the cracks. When it comes to alternative financing, this is made possible with a new approach of using current data to evaluate an enterprise. Fintechs are able to assess the creditworthiness of businesses and distribute loans rapidly, all while going through the due diligence process.
By leveraging data analytics, fintechs are able to give targeted support by minimizing risks prior to lending and constructing a sustainable funding plan for struggling businesses. Instead of basing it entirely on profitability, alternative financing looks at other forms of real-time data to predict the health of a business, requiring data as simple as the cash flow statement. Its cutting-edge technology and digital financial offerings will be the future and are more essential now than ever.
In a world that puts digital first, speed is everything. With innovative lending models and scalable funding structures, the alternative lending sector will be a key enabler in helping support small enterprises to survive the crisis and recover. It seems that the fintech industry has a bright future and potential collaborations in which SMEs will benefit from it in the years ahead.
(Ed. Featured image courtesy of Pixabay.)