The Future of Resilient SME Financing

Financial education, collaboration on ESG and how data sharing can lead to a better understanding of risk and opportunity, and therefore a more resilient foundation for lending to SMEs.

I recently had the pleasure of speaking to Dame Teresa Graham, Chair of the SME Advisory Group at UKFinance, along with my colleague Ravi Sidhu, Subject Matter Expert in Credit, Risk and Compliance at Dun & Bradstreet. Dame Teresa is an advocate for small and medium enterprises (SMEs). She is passionate about providing advice and guidance to both SMEs and the government, and cutting through the red tape that presents this group with so many challenges.

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During our discussion we covered several topics – from the challenges SMEs face and their borrowing behaviours to initiatives the financial services sector can implement to support SMEs, including education, ESG and democratising data.

In this blog, we cover the need for better financial education for SMEs, question who should take the burden of moving the needle on ESG, address data sharing and explore why spending the day in the shoes of an SME might be a good idea.

Financial Education

I discussed in Part 1 of this blog that SMEs have a limited awareness of the financial products out there available to them, beyond overdrafts and loans. Financial institutions, government and big businesses all have a role to play in signposting SMEs to financial and business literacy, as well as matching them better to the funding/lending source that suits them best at a particular point in time.

Banks can also become a trusted platform for SMEs – offering more than just lending and providing additional value in the shape of tax services, advice, invoice processing, debt management and more, which builds customer loyalty and reduces the risk of insolvency.

Embracing ESG

SMEs are ready to embrace sustainability. The challenges that they continue to face are resource constraints and knowledge gaps. Banks are changing their risk frameworks to go beyond credit risk, bringing in additional overlays such as sustainability. But does the role of becoming sustainable depend solely on the SME? Or is there something financial institutions can do to support them in reaching Net Zero?

Dame Teresa told us “I do not understand in terms of net zero, how the financial services world can’t be aligned on a number of things like carbon calculators… how can there be a hundred ways of calculating carbon? If 11 of the biggest banks agreed how to do this, it would be a level-playing field for the SMEs.” Big businesses can help their smaller brethren, it’s in their best interest to help their customers and supply chain to reach their own goals. So, why not work with those businesses to collaborate on moving the needle?

There is certainly a lot the financial services world does to support its own ESG goals, though while many have focused on the ‘E’ or environmental aspect due to COP 27 and the drive for NetZero, the ‘S’ (social) and ‘G’ (governance) aspects can be neglected. These are areas that traditionally address SMEs as part of the wider ecosystem. Technology and data can help to better understand ESG performance and identify areas where both the banks and their SMEs can make changes together.

Democratising Data

In the last few years, we’ve had the Commercial Credit Data Sharing (CCDS) in place across 9 of the larger banks. My colleague Ravi Sidhu has been a big advocate for this, as it helps in gaining a more holistic view of lending from multiple organisations. But perhaps this data isn’t shared widely enough to understand the SME group – certainly the challenger banks are not included, and with many SMEs turning to less traditional banks, this means a gap could emerge in the picture.

During the discussion with Dame Teresa, Ravi told us “Banks are sitting on a lot of information in terms of what they perceive as a good risk…and what they see as a more negative risk…for prospective SMEs, that information is useful to understand how the banks perceive their risk.”

Democratising data would help SMEs view their own credit risk, with a view to managing their finances and making themselves more favourable to lenders.

The Missing Pieces

I asked Dame Teresa what she thinks is missing in terms of support for SMEs, and what changes businesses, including financial institutions, could make in the short term. She believes, “Businesses should have a director on their board responsible for the engagement of SMEs… where this happens, there is a positive benefit to the SMEs in their supply chain. And we’ve seen that on prompt payment in particular.”

So, there we have it – there are several avenues financial institutions can take to support SMEs. Whether that be through financial education, offering a platform providing easy access to additional services, collaborating to improve ESG performance, sharing data on perceived risk or simply having someone overseeing SME engagement. With SMEs making up such a large percentage of businesses, one, or a combination of these can help financial services companies to move the needle on their own goals around risk and resilience, as well as creating opportunity for growth.

Watch the full video

Listen to the podcast on Apple

Listen to the podcast on Spotify