The SME (small and medium-sized enterprise) lending landscape is evolving rapidly, with lenders under increasing pressure to make faster, more informed decisions. SMEs, defined as businesses with fewer than 250 employees, makeup 99.9% of all businesses in the UK, employ 61% of the workforce, and contribute a staggering £2.1 trillion in annual turnover. These small and micro businesses are not only a lucrative and growing market but are also critical to the country's economic future. For SMEs, access to loans and credit lines is essential for transforming growth potential into long-term success.
However, despite the increasing number of SMEs, many financial institutions are failing to fully capitalise on this sector's potential. According to data from the Bank of England, lending to this lucrative market has decreased by 4.6% compared to the previous year. Many lenders still treat SMEs as corporate entities, relying on outdated models and legacy processes that are manual-heavy and prone to human error. This outdated approach represents a significant untapped opportunity in the SME lending market.
SME lending is fraught with challenges, primarily stemming from the limited commercial credit histories of many small businesses. This lack of historical data complicates lenders' ability to assess risk accurately, resulting in time-consuming and costly decision-making processes. Many SMEs do not maintain the same level of financial reporting as larger firms, which hampers lenders' efforts to evaluate their financial health. Consequently, this can skew the decision-making process, often leading to an overestimation of risk. This miscalibration can result in higher interest rates or outright denial of credit for SMEs, even when they might be viable businesses.
Additionally, the manual nature of many existing lending processes introduces the potential for human error and inconsistencies. Legacy systems, heavily reliant on spreadsheets and manual input, can slow down decision-making and leave room for mistakes. In today’s fast-paced financial landscape, such an approach is unsustainable.
A recent report by the British Business Bank highlights that over 50% of SMEs in the UK experience difficulties in securing finance, primarily due to the lack of credit history or inadequate documentation.
Although there is no one-size-fits-all solution for SME lending, the issue is not a lack of demand but rather a lack of the right tools to make data-driven, intelligent decisions quickly and efficiently. Financial institutions that embrace new technologies and rethink their approach to the SME market are beginning to see significant benefits. These organisations recognise that to achieve sustainable growth, they must move away from the outdated mindset that views SMEs as mere smaller versions of large corporations.
The end goal for all of us is resilience.
Payal Dalal,
Senior Vice President, Mastercard
As we move past the turbulent economic climate and the immediate fallout from COVID-19, many businesses continue to grapple with the aftereffects. The new credit cycle presents an evolving landscape for SME lending, which is poised to become not only one of the most economically significant sectors but also a vital contributor to lenders’ revenues. Research from the World Bank indicates that SMEs face unmet financing needs amounting to $5.2 trillion annually, roughly 1.5 times the current lending market for these businesses.
Despite the promising opportunities on the horizon, lenders are expected to face significant challenges in implementing adequate lending solutions tailored for the SME sector while also reducing servicing costs. Historically, many financial institutions have viewed SMEs through a traditional lens, failing to recognise them as sophisticated customers akin to their global counterparts. Embracing advanced technologies—particularly automation and data-driven approaches—will be crucial. Serving as the foundation for reducing the cost of serving SMEs and mitigating associated risks
Economic instability is expected to continue through 2024 and into 2025 as the UK economy attempts to recover from years of stagnation. SMEs are already bearing the brunt of this turbulence, with insolvencies reaching 25,158 across England and Wales in 2023—the highest number recorded since 1993—representing a 14% increase from the previous year.
In response to rising risks, lenders are tightening their criteria. UK loan defaults have surged by 65% from 2022 to 2023, highlighting the urgent need for a proactive approach to credit risk management. This situation emphasises the importance of real-time data analysis for informed lending decisions.
These trends not only reflect the mounting challenges for SMEs and their financial partners but also present a significant business opportunity. By leveraging greater real-time insights to inform decisions, lenders can differentiate themselves competitively while effectively managing risk in their portfolios.
In business, time is money—especially for SMEs, where every penny and every minute can make the difference between success and failure. SMEs need to move quickly, seizing new opportunities as they arise. Given their familiarity with digital banking in their personal lives, they now expect the same seamless experience from their financial service providers. A swift, streamlined decision-making process can be the deciding factor when choosing between lenders.
Serving SMEs with faster, easier and more affordable digital solutions helps them to build their customer bases and leverage new market opportunities. This is what the small business sector needs to not just survive, but to thrive.
Neil Caldwell,
Head of Merchant Sales & Acquiring, Visa CEMEA
Making informed judgments about an SME's creditworthiness has always been challenging for lenders. The limited risk indicators available can lead to higher credit loss rates and decreased confidence in SME portfolios. This issue is intensified by many startups using personal bank accounts for business, which skews traditional credit assessments.
To tackle these challenges, the UK government has introduced the Commercial Credit Data Sharing (CCDS) initiative. By combining finance agreement data with commercial credit data, lenders gain a clearer understanding of SMEs' financial commitments and lending behaviours.
Creditsafe, as a designated credit reference agency under the CCDS scheme, enables faster and more accurate lending decisions. Their Finance Performance Indicator (FPI) uses diverse datasets to assess the likelihood of default within 90 days, scoring from 0 to 9. This approach helps lenders identify low-risk opportunities and develop better customer management strategies.
This data-driven approach allows lenders to pinpoint low-risk opportunities and adapt their customer management strategies to reflect evolving behaviours and circumstances. By integrating various data points, lenders can uncover new growth opportunities while effectively managing risk.
As the SME lending landscape continues to evolve, success will increasingly depend on partnering with the right lenders. Creditsafe, one of the UK's leading credit reference agencies, leverages innovative data-sharing initiatives like the CCDS, combined with advanced analytics from over 430 million businesses, directors, and shareholders, to empower lenders to make informed decisions and better serve the SME sector.
The future of SME lending is not just about the numbers; it's about relationships, understanding, and the strategic use of data to foster a thriving economic environment. By embracing these tools, lenders can unlock the full potential of the SME market