Small and Medium Scale industries (SMEs) have been increasingly contributing towards the global economy. The advent of FinTech only helps make it stronger. They contribute more than half of World’s Gross Domestic Product (GDP) and employ almost two-thirds of the global workforce.The global financial crisis along with stringent regulation and capital costs for loans to SMEs has made financing an ever-growing struggle for these businesses. SMEs often have one major pain point that affects their financing in every scale: dealing with their finances.
Challenges in SME financing
- A “funding gap” of more than $2 trillion exists for SMEs in the emerging markets (as reported by International Financial Corporation [IFC])
- Finances for SMEs are categorized as high complexity and low capital. Owing to this and high loan regulations, banks expose themselves less to SME financing.
- SMEs tend to lack the resources and skill set to handle raising funds in the sophisticated economy.
FinTech: it’s disruptive and you can benefit
The global financial crisis had given rise to a number of disruptors in FinTech (Finance + Technology). There were a number of innovations that suggested ways to originate funds, assess credit risk and finally provide funds to SMEs. These enable SMEs to secure funding for their growth. This trend in FinTech was a potential game changer for the SMEs.
FinTech products in the market that are tailored to the needs of a small scale industry
- Marketplace lending (peer-to-peer): They provide solutions where banks cannot. Unsecured lending is the most common form of market place lending. This is because of their eccentric operating model.
- Invoice financing: FinTech solutions help SMEs in monetizing outstanding receivables. By connecting their accounting software to their invoice-financing platform, they can apply loans based on their “receivables outstanding”.
- Merchant and e-commerce financing: e-commerce platforms and telecom companies lend money to SMEs selling their goods in their platform. This initially evolved in 2012 and has seen a steep increase from then on. There are plenty of platforms available in the internet that provide this type of financing. Example, Amazon, Alibaba, PayPal.
- Online supply chain financing: while invoice financing operates on “receivables outstanding”, Supply chain financing operates on “approved payables”. This involves the buyer, supplier and the third-party finance provider. When a business model is setup with supply chain financing, the supplier has an option to payout the invoice amount early at a discount. The discounted rate is paid by the buyer of the invoice.
- Capital Raising: this form of financing helps you raise funds from your own network. You source your contacts from a professional network for example LinkedIn, and contact them to see if they are interested. This is best done with a help of technology. This process is fast and helps target multiple potential and unexpected investors at the same time.
- Trade financing: non-bank players have developed innovative ways to address the funding needs of SMEs. A third party investor will provide initial and working capital in exchange for an attractive return. This is a gigantic market and is speculated to grow in the coming years. This type of finance has always been restricted to SMEs.