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SMEs struggle to raise capital is affecting job creation | Image Credit: Mambu

Small and medium enterprises were one of the many casualties of the pandemic. While SMEs were thriving before the pandemic, the lack of digital storefront and digitisation strategy pulled them back. Another thing that stopped the progress of a number of small and medium enterprises during the pandemic is lack of funding.

A new report from Netherlands-based cloud banking platform Mambu shows that more than two-thirds (67 per cent) of small and medium sized enterprises (SMEs) globally were unable to secure sufficient or any funding on at least one or more occasions. The report shows how SME lending could become a major roadblock to economic development and job creation.

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Small Business, Big Growth report: what you need to know

The Small Business, Big Growth report is an annual survey by fintech platform Mambu that sees participation from more than 1,000 SME owners globally. This year’s report, in particular, paints a grim picture of how SMEs have struggled to get funding since the pandemic. The report shows that 32 per cent of the SMEs that launched since the pandemic and 33 per cent of launching soon found it difficult to secure starting capital.

This is higher than 28 per cent of SMEs launched before March 2020, translating to an increase of 17.5 per cent. The SMEs make up around 90 per cent of businesses worldwide and employ more than half of the global workforce. According to the World Bank, the formal small and medium enterprises (SMEs) contribute up to 40 per cent of global domestic product (GDP) in emerging countries.

SMEs are thus recognised as the backbone of the global economy and their inability to raise adequate funds could lead to disruption in job creation. “SMEs are the lifeblood of the global economy and responsible for driving growth, job creation and the post-pandemic recovery. But they are facing big challenges. Access to external funding has become difficult during the pandemic amid record demand for financing and increased friction in the lending process,” says Eugene Danilkis, CEO at Mambu.

In August 2020, McKinsey reported that 70 per cent of European SMEs saw their revenues decline as a result of COVID-19. The research done by Mambu shows that 15 per cent of SMEs started trading after being put on furlough or made redundant due to COVID-19.

Reliance on family and friends for business loans

The report shows that almost half of the SME owners have turned to personal networks for their business. Nearly 43 per cent of the SMEs surveyed by Mambu globally revealed that they used funds from friends and family to help set up their business and this number increased to 57 per cent among SME owners in Indonesia.

In all countries surveyed, except Germany and Sweden, the top funding source for SMEs were found to be friends and family members. The business partners and digital-only banks emerged as top sources for funding in Germany and Sweden.

The study also shows that 48 per cent of SMEs launching soon were at least partially funded by friends and family. The report shows that reliance on family and friends for business loans increased by 11 percent during COVID-19.

Short-term loan and other sources of funding

The study also shows that short-term loans were the most popular source of external funding with over a quarter (26 per cent) of SMEs launched in the last five years taking out a short-term loan for their business. This is closely followed by startup loans at 25 per cent, business lines of credit (22 per cent), and business term loans (22 per cent).

Mambu research also shows the disparity between SMEs funded by unsecured and secured loans. The report shows that 32 per cent of businesses funded by unsecured loans are likely to take out short-terms loans while that number drops to 25 per cent among those funded by secured loans.

Besides friends and family, the other key sources of income for SMEs included traditional banks, building societies/credit unions (30 per cent), personal funds (28 per cent), and business partners (27 per cent).

Barriers faced by SMEs while securing funds

The research shows that 30 per cent of businesses attributed the lack of enough starting capital as the biggest barrier when attempting to secure capital. It is followed by too much paperwork and administration in the lending process at 28 per cent, and cash flow not being considered strong enough at 27 per cent.

SMEs also cited slow lending speeds (26 per cent), arduous application processes (25 per cent), and rigid lending criteria (25 per cent) as some of the barriers. This inability of SMEs to secure funding had made it difficult for them to evolve their businesses and remain competitive.

Among the SMEs surveyed, 35 per cent said they have experienced cash flow issues while 33 per cent have been unable to launch new products. The report further shows that 33 per cent have been unable to hire effectively. According to Mambu’s research, these issues and cash flow being one of the major barriers, SMEs are finding themselves in a “vicious circle of decline.”

Inability to hire or scale-up

The Small Business, Big Growth report from Mambu also shows how the great resignation that saw more than 24 million people quit jobs in the US between April, 2021, and September, 2021, is tied to inability of SMEs to raise adequate funding. Nearly a third of the SMEs (30 per cent) cited that shrinking access to funding hampered their hiring plans.

Among larger SMEs, with 101 to 250 employees, almost 40 per cent surveyed said they have curtailed their ability to hire. This was followed by scale-up or pay for upgrades or improvements at 36 per cent.

Alternative lending to overcome these barriers

In order to overcome the above-mentioned barriers, SMEs are looking at alternative lending options such as challenger banks and fintechs. Among the SMEs surveyed by Mambu, 92 per cent said they are open to changing lenders for different or simpler digital support.

The report also shows that two thirds (66 per cent) of both SMEs that launched after March 2020 and those set to launch in the immediate future are considering digital services as an important lending consideration, versus only 53 per cent of SMEs launched before March 2020.

“It’s no surprise SMEs are ready to jump ship for better, more accessible services. If lenders want to stand out, they must transform and modernise their financial experiences to ensure SME success; this includes faster onboarding and loan decisions, harnessing the power of the cloud and offering mobile and digital-first products,” Danilkis adds.

Financial institutions: what can they do?

The study also shows that SMEs expect financial institutions to do more to tackle the challenging application process for loans. When choosing a lender, the length taken to apply for a loan is a major influence on SMEs and a short application process was among the top three most important considerations.

The majority of SMEs also reported interest in faster loan decision processing (79 per cent), more flexible loan conditions (78 per cent), tailored offers and services (76 per cent), and low or no collateral requirements (75 per cent).

Richard Lim, CEO of Retail Economics, says, “The pandemic has ushered in enormous changes in how we work, play and shop, accelerating the democratisation of digital and with its repercussions still reverberating across society. But access to capital is an area where digitisation has matured at a much slower place. All too often, businesses looking to scale quickly and seize opportunities are choked by exhausting application processes. Stifled by slow and inefficient practices, current lending practices are no longer fit-for-purpose in today’s fast paced, digital world.”