The missing piece of the SME financing puzzle

Every day on my way to work I pass by a Westpac Bank branch. Usually it hardly gives me pause for thought – I’m generally far more focused on getting to my first caffeine hit for the day. But last Thursday, something in the branch’s window caught my eye. It was a poster advertising Westpac Live, the Australian bank’s online business banking portal. What drew me in and made me stop for a moment was the poster’s headline and image. It read, ‘You didn’t become a chef to become an accountant’, accompanied by a picture of a young man in his chef whites bent over a piece of paper at his kitchen workbench.

The poster couldn’t have more eloquently summed up the conundrum that is small business. The reality, as Westpac knows, is that most business owners are the ‘chefs’ of this world. They’d rather be doing the thing they were trained for versus the thing they weren’t – managing and securing business finance. Small business entrepreneurs are far more passionate about serving up an unforgettable fine dining experience, or delivering a bouquet of flowers to a wedding ceremony on time. Managing incomings and outgoings are just the oil that keeps the creativity engine in motion. Finances are the thing that they have to do so they can do the thing they want to do – a subtle but important difference.

This assumption is backed up by a World Economic Forum SME Finance report released in October 2015. ‘In a recent UK survey’, the report states, ‘SMEs named “accessing external finance” as their poorest area of expertise, falling sharply behind all other capabilities, including people management, managing taxes or introducing new products’.

So if finance related activities are a founder’s least favourite task, at face value it would seem that just making finance easier to access would be the solution. Today we see this in play in the Fintech space, through marketplace lenders like OnDeck, invoice financiers like MarketInvoice, supply chain solutions like Taulia and merchant cash advancement products from PayPal.

But is it possibly more nuanced than that? Could another part of the SME financing puzzle be more about what to actually do with the money once its been obtained? Maybe the Fintech thinking mistake about SME finance is that ease of access and good terms are all that’s needed. Perhaps the real gold to be mined is in building AI tools that help the chefs of this world make ‘accountant like decisions’ about which finance options to choose from, and when, so they can get on with doing what they love – creating.

The Evidence

SME Fintech is largely predicated on wanting to help SMEs start, grow and thrive. So evidence to support this hypothesis could be found by turning our attention to the reasons why businesses fail. If we can understand the reasons behind failure, perhaps we can work out how to stop the rot before it starts, and even plug with smart product.

Evidence could be found in the shape of a study on business discontinuance rates by the Global Entrepreneurship Monitor. Based on a survey of terminated businesses globally, it puts two financial roadblocks in the spotlight as to why businesses terminate within the first 12 months of operation: problems getting finance and the business not being profitable. Across every region, businesses not being profitable wins out as the main financially related discontinuance reason, over and above problems getting finance.

So what can we take from this. Well, firstly the data doesn’t tell us access isn’t an issue – it clearly is. But it also tells us a more complex issue is at play, that of profitability. And often, that’s where business owners, like our chef, need the most help. The question then becomes, how can he balance his funding across his business, so he can optimise cashflow, generate profits and stay in business? What mix of terms and discounting should he be offering his buyers? How and when should he pay his suppliers?

AI powered decisions give SMEs back what they want most – time

Market awareness for non-bank SME funding solutions is a huge problem. Once this is solved, the next problem a business owner will face is how to make the best decision for his financing requirements based on the plethora of financing options at his disposal. Paralysis of choice is switching-inertia’s best friend, and naturally Fintech’s most feared foe.

Fintech startups in the SME funding space need to think about how they can integrate into an SME’s decision making process so that choosing them becomes a ‘no-brainer’. Today many of them are cuddling up to the accountants and bookkeepers of this world. But tomorrow, cloud accounting platforms like Xero could very well host a virtual accountant for every SME out there.

So far most alternative non-bank lenders have been smart enough to plug into platforms like Xero’s to scrape data in order to provide credit assessments and seamlessly reconcile and manage loan repayments. But when will a Fintech startup use cloud accounting APIs to plug in and build the first SME roboadvice tool, to help businesses make smart strategic decisions, funding included? With the rapid rise of AI, the SMEs Siri could be a lot closer than we’d ever imagined.