April 15, 2019

Ways to Support SMEs in Recovering from the Economic Slowdown Caused by the COVID-19 Pandemic

The COVID-19 pandemic has caused a world health emergency that has created the worst global financial crisis in decades. Everything from commerce, employment, investment, and growth has been affected, and many small and medium enterprises (SMEs) have incurred large-scale losses. Many countries are experiencing a reduction or total halt in production across a wide range of industries.

This has led to the collapse of people’s ability and willingness to consume as many people are out of work. SME’s have been particularly hit hard by the impact of this pandemic and there’s an urgent need to find ways to help SMEs survive through these uncertain times.

SMEs are extremely important for the world economy and need to thrive as they account for almost 7 out of every 10 jobs, and over 50% of most countries’ GDP. That’s why it is important to provide SME’s with support through financial backing to enable them support their staff, families, and communities.

SME’s in the fast-growing economies are especially at risk as they contend with interrupted supply chains, reduced demand, and increasing scarcity of finance. Unfortunately, traditional lending models have always been quite rigid when it comes to financing SMEs in fast-growing economies. Luckily, various people are making efforts to find new approaches that can unlock financial support and drive the recovery of SME’s from the losses caused by the pandemic.

Limitations of Traditional Lending Models

The reality for SMEs in the current business environment is that traditional lending is a mismatch for today’s SMEs and has failed to solve the challenge of scarcity of credit for most SMEs. Many business owners often lack the collateral needed in order to qualify for credit from most financial institutions. Financial lenders also rely on credit reports to evaluate SMEs, but the problem with many fast growing economies is that the positive and negative data needed to perform credit scoring is difficult to find.

Other business owners feel it’s not worth the time approaching a financial institution and waiting for a couple of months yet you are not fully-guaranteed the bank will lend you the money. In some countries, for example, less than 7% of small business owners have ever applied for a formal loan. In other cases, the lending institution will rarely approve any loan requests below a certain amount, which might still be too much for some types of struggling SMEs. Even when SMEs produce audited statements, 5-year projections, and filed tax returns, the chances of getting a loan after a long application process remain pretty low in many countries.

New Avenues for Supporting SMEs with Capital

Luckily, a growing number of fintech lenders are particularly targeting SMEs and offering a revolutionary model of supporting SMEs with capital in a way that is a lot faster, way easier, more transparent, and more cost-effective. These fintech lenders are providing SMEs with platforms where business owners can share the business data they have in exchange for accessing loans to help sustain and grow their businesses.

These platforms use advanced analytics and artificial intelligence to analyze transactional data on simple documents like bank statements to show a business’s cash flow. The platforms help lenders gain deeper understanding of the operations of the business and establish its credit worthiness and risk vulnerability easily. This means the business can access loans a lot faster, usually within 24 hours, with some lenders like Lidya lending amounts as little as $150 to SMEs in Europe and Africa. These new, innovative models of lending to SMEs are certainly more appropriate when it comes to serving the financing needs of SMEs, and cushion them from the impact of the looming economic crisis, and ultimately unlock their full potential.

What support can Governments provide?

Governments can help to promote these new financial lending models by providing a stimulus package to the various players involved in exchanging data for the purpose of digital SME lending. There’s also a need for the government, tech giants, insurers, creditors, banks, alternative lenders, credit agencies, financial institutions, and SME service providers to work together in order to reduce the persistent SME credit crunch.

Governments and international institutions are also taking extraordinary steps to reduce the negative impacts of the current crisis on business operations and employees. For instance, the International Chamber of Commerce recently launched a campaign aiming to save SMEs across the world. One of the campaign’s calls to action is a call to ensure effective policies and fiscal responses are implemented at the national as well as international levels. Some countries have introduced measures directly targeted at SMEs like reducing working time, temporary lay-offs, and sick offs. Similarly, some governments are providing incomes and wage support for workers that have been temporarily laid off, or for businesses to safeguard employment.

The campaign is also calling for governments and financial institutions to provide SMEs with the resources and tools necessary to support survival in the prevailing economic shocks and in future. In order to reduce liquidity constraints, some countries have implemented measures like deferral of tax, debt payment, social security payments, and utility and rent payment. In other countries governments have introduced a moratorium on debt repayments and tax relief, while others are providing SMEs with loan guarantees to facilitate commercial banks to lend to SMEs. Some countries have even stepped up with direct lending through public institutions.

Given the uncertain circumstances that SMEs across the globe are currently facing, it is promising to see that financial and tech industry players, international bodies, and governments are putting measures in place to support SMEs. As more SMEs find the need to access credit to survive through this crisis, the financial industry will be forced to digitize its lending operations and become more responsive to the needs of SMEs. It will be more encouraging to see that young generations of entrepreneurs from all over the world will have an easier time accessing financial lending in a fast-changing world.