SME Banking and SME Finance, what does business need?

In recent years, SMEs have found themselves at the centre of the banking sector’s attention, which until then had partly neglected them, with a few exceptions, thanks to the awareness that for the country’s recovery, they need to be financially healthy. 

Hence SME finance and SME banking.  The arrival of the pandemic has heightened the need for dedicated offers and to devote special attention to their needs to ensure that all realities with deserving businesses could continue to grow in a healthy and steady way, also for the good of the Italian economy based on small or medium-sized companies and certainly not on giants and unicorns. 

SME Banking and SME Finance: possible approaches 

Having confirmed the unquestionable importance of SMEs for Italy, and also for many other countries with a similar entrepreneurial fabric, we can explore the different approaches that various players have put in place to lend a hand and conquer this inviting but complex slice of the market. 

What are the best ways to serve this sector? This list is not meant to be exhaustive, but to show that there are many possible strategies for SME finance and SME banking. 

There are those who have proposed collateral-based loans like many traditional banks and finance companies, with packages made by combining asset-based loans, contribution-based financing, invoice discounting and factoring-based financing, using reliable debtors or contracts. Data and information lending has also sprung up, often associated with balance sheet lending, credit scoring and relationship lending, and then there is also viability-based financing especially associated with venture capital. In all this it could be seen that often the type of proposition did not depend on the value of the business but on many other factors that govern the logic of SME banking, based on data, but not only.

SME Banking and the SME gap 

The lockdown did nothing more than swell the ranks of the already existing team of companies excluded from the banking sector, unable to access the classic offer that banks have always reserved for SMEs but from which only a small number could benefit. These are all those companies unable to provide the solidity required for conventional bank loans, nor returns high enough to attract venture capital or other high-risk investments. 

The lack of information from the markets has further limited the effectiveness of offers based on financial statements and credit scoring, and the “SME finance gap” or Nano gap has become increasingly evident and serious. This is a problem that SME banking is trying to solve, not by giving money away but by rewarding those who deserve to survive and grow.

Two possible ways have been explored previously:

• Expanding the collateral-based approach, encouraging bank lenders to finance SMEs with insufficient collateral, a difficult route to pursue in the free market.

• Expanding the profitability-based approach to the business itself to provide better overall business development assistance and reduce risk by increasing returns. 

SME banking and lending for SME growth 

In-depth and interesting analyses have been made over the years on the methods by which banks evaluate and monitor business loans, manage financing risks and price their products. 

There is a world to study and also to improve as many fintech companies have done, choosing SME banking as their core business. The focus is increasingly on the type of financial information about companies that banks use to make lending decisions, how reliable it actually is and how comprehensive it is.

Banks have always relied on a combination of documentary sources of information, interviews and visits, and the personal knowledge and experience of managers in evaluating and monitoring business loans. 

These are all techniques that cannot work with small and simple businesses that find themselves assessed with increasingly accurate and possibly fair credit scoring standards to enable banks to offer more loans, faster and for larger amounts, reducing previously high security requirements. Banks, but not only banks, also many other players, especially fintechs, with a wise use of data and all the technologies to analyse it and draw useful information from it, are contributing to an increasingly wide, competitive and useful SME banking and SME finance offer for the SME ecosystem.