First Analysis White Paper

The prevailing financing gap facing SMEs around the world is a widely acknowledged phenomenon preventing SMEs, the backbone of our modern economies, from fully reaching their potential. Regardless of the issues when facing traditional banks with their lengthy and complicated lending procedures, one of the main reasons that SMEs are given the cold shoulder when looking for working capital is that banks have difficulties to profitably lend to SMEs as they lack highly automated and largely digitised processes. Together with MEDICI, a global research company focusing on Fintech, we recently published the European white paper Accelerating SME lending, which examines how harnessing digital technology can streamline operations and enable SME lenders to offer cost-efficient same-day financing.

First Analysis, a venture capital investor, has also just published another insightful white paper Lending as a Service – SME funding gap driving demand for technology to turbocharge lending elaborating on how technology can help close the financing gap for SMEs, with a specific focus on the US and UK markets. First Analysis mentions Spotcap as a business that offers a state-of-the-art Lending as a Service (LaaS) proposition as a practical solution to financial institutions. With that in mind, I want to briefly summarise the key findings from their white paper while also highlighting how our lending solution can benefit the wider ecosystem and eventually help SMEs access tailored and flexible financing:

  • Costly underwriting and loan origination for traditional banks
  • Cumbersome and lengthy lending processes for SME borrowers
  • Limited and unfavourable funding options for SME borrowers
  • Reliance on traditional data sources in the underwriting approach

Costly underwriting and loan origination for traditional banks

For traditional banks, the costs associated with existing lending practices exceed the loan sizes required by SMEs to create sufficient profits from lending. Such a mismatch makes it often economically unappealing for banks to provide such types of loans, resulting in the mentioned funding gap for SMEs. A study by Deloitte claims that for US lenders, SME loans cost between $2,500 and $10,000 to process and fund.

Cumbersome and lengthy lending processes for SME borrowers

As a result of inflexible legacy lending platforms, as well as largely manual underwriting procedures, combined with the requirement to provide a significant number and variety of documents, SMEs are not able to receive timely and flexible financing from traditional lenders. The study by Deloitte claims that the time-to-fund is on average, ten weeks for US lenders, which is significantly beyond any acceptable timeframe for SMEs and, in consequence, can threaten their very existence.

Limited and unfavourable funding options for SME borrowers

Apart from the complicated and lengthy lending services, SME borrowers are also often faced with unfavourable outcomes and, therefore, have to revert to personal guarantees or even asset security to secure liquidity for their businesses. Other SMEs turn to alternative financial solutions such as credit cards, home equity credit lines, or personal lines of credit that result in certain limitations and ultimately, result in insubstantially higher costs.

Reliance on traditional data sources in the underwriting approach

This widespread time-consuming and costly one-size-fits-all approach to underwriting is disadvantageous for both traditional banks and SMEs. Access to further and additional data sources on small businesses at lower costs can make a significant difference. The emergence of Open Banking, a process that began in the European Union with banks providing bank account data through their APIs and often via 3rd party providers, is a great and important example. Leveraging bank transactions can boost the expansion of tailored financial products at more competitive prices than traditional lending, and in turn, to a wider spectrum of borrowers.

Future outlook

Despite a somewhat positive change in the recent years, resulting from the Open Banking initiative in the UK, which led to a moderate decrease in the respective SME funding gap, the net growth in UK SME lending has largely come from small banks and in particular, non-traditional lenders that claim that they can better predict SMEs’ repayment behaviour and their overall financial health. However, according to First Analysis, further data points, including those generated by insurance companies, utilities and landlords, as well as internet product and service reviews, can further advance the situation in a positive direction. It might also allow for lower risks associated with anti-money-laundering compliance.

The Spotcap solution – LendSuite

While operating as an alternative lender for more than five years, in 2018 we started to provide our proprietary technology and expertise to financial institutions to offer faster and more affordable financial services to an even wider range of SMEs, on a global scale. Below, I have summarised in a brief overview of how our lending platform, which we offer as a white label solution to multiple financial institutions, is able to overcome the aforementioned issues highlighted by First Analysis:

Costly underwriting and loan origination for traditional banksSpotcap’s end-to-end lending platform LendSuite keeps manual steps to a bare minimum across the entire value chain due to highly automated underwriting processes through our proprietary Decision Engine Module.
Cumbersome and lengthy lending processes for SME borrowersSpotcap’s smart onboarding service allows SME borrowers to apply online within minutes, saving time and hassle. In addition, our advanced document automation system slashes processing time to seconds and gives applicants real-time feedback, in turn increasing transparency as well as overall experience levels.
Limited and unfavourable funding options for SME borrowersOur solution is configurable to directly or indirectly (through API connections) offer a wide range of unsecured and secured funding options from small to 6-digit credit amounts. As such, tailored financing can be provided based on a global capacity credit concept through our limit engine.
Reliance on traditional data sources in the underwriting approachOur proprietary risk analytics and risk models contain a rich set of data points from various traditional and non-traditional data sources. A focus is on bank account transactions and receivable data, as well as data points from web search through the utilisation of web automation techniques. Such insights can be harnessed in isolation or in a complementary manner to existing rating models by financial institutions.

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