They say the night is darkest before the dawn – which is certainly how it can feel in fintech startup land. You’re always $1 away from disaster, or $1 of leverage away from disaster if you’re a fintech lender. Small books can be painful beasts to manage.
Which is why it is all the more impressive to see Iwoca steam ahead of some big lenders with deep pockets in the UK market. The SME lender now has claim to 12% of all new business overdrafts, beating Santander at 9% and HSBC at 11% according to Forbes, who sourced the data from UK Finance. They aren’t far behind Barclays at 15% and Lloyds at 20%.
While overdrafts are falling out of favour with businesses in lieu of the more attractive benefits business credit cards offer, they still represent an ‘understood’ cash funding entry point into the SME lending space.
According to additional data from UK Finance, the average % acceptance rates for overdrafts is 82.6%, compared to 69.1% for business loans.
Being a funding type that is ‘understood’ is half the challenge for new SME lenders, especially given hardly any businesses understand the types of financing they can access now.
Not knowing what you don’t know is a problem in SME lending land, and could potentially be a large factor behind the estimated £3 billion to £9 billion funding gap SMEs face in the UK. SME owners rarely seek advice before seeking funding and UK Finance reports, ‘the time spent investigating options is woeful.’
With companies like Iwoca forming multi-million-dollar lending chests, along with other fintechs, the real opportunity isn’t necessarily in more Iwocas – most are probably nowhere near capacity – but in developing more pre-lending advisory services that can help SMEs navigate the plethora of choices.
In 2017 it was reported that less than 1 in 5 SMEs sought advice on lending options, despite 45% of SMEs planning growth. This is a huge disparity, and one that someone with a smart, simple and cost-effective solution could solve. Traditional business brokers are probably not the answer, especially given their advice often comes coloured with the commission they earn in the background.
It’s always tempting to solve the simple problem in front of your nose – market the product more – but the smart entrepreneurs in SME lending land need to be looking far-further up the funnel, for the marketing and sales arbitrage opportunities that exist in tangential digitised advice businesses. I’ve always considered a ‘get-finance-ready’ platform a great plug in to any SME, provided it could be done smartly and digitally.
If you come across any in your travels – let me know!
Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a new superannuation startup in Australia.
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post. I was a previous employee at Tyro.
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