Blog article
See all stories »

Business is Broken

Late last year, Business Secretary Vince Cable stated he felt the Funding for Lending Scheme (FLS) wasn’t working and rightly so. Figures from the Bank of England FLS[1] showed that net lending to small and medium-sized businesses fell by £723m in the first quarter of this year despite scrapping mortgage support to encourage corporate lending. Whilst the government, and most recently in the Queen’s Speech, is acknowledging issues in SME lending the main problem is that it is still in the hypothesising phase. SMEs need change now, not in the future. With £55 billion owned in late payments, many can’t afford to wait for a solution and have turned to alternative funding.

Experian released findings from a survey of 600 SMEs[2], which discovered that almost one third of those that used personal finance had used a mortgage to fund their business, putting their home at risk. Almost half had used personal credit cards to fund their businesses. Resourceful? Maybe. Does it leave them vulnerable? Definitely! I’m continually seeing reports and articles which highlight the struggles SMEs are facing as they look to recover from a crippling recession.

However, while these stories all highlight serious challenges for the SME sector, access to finance is only a part of a broader issue - the inability to connect with other organisations, especially enterprises, is proving to be the biggest impediment. Collaborating with other businesses and their respective processes, whether it is procurement, payment, lending etc… has become a mammoth task. It’s putting a major strain on SMEs’ time, resource and own funds and, put simply, its breaking business, both in the immediate and future term. The lack of connectivity is genuinely hurting SME's ability to access cash – they aren’t getting paid, and with no cash, they cannot evolve their respective propositions. The fact we have seen such prolific criticism of SME lending in recent months, demonstrates that this connectivity needs to be addressed. The Funding for Lending Scheme is faltering and when you add further challenges into the mix, you can see that SMEs need all the help they can get. Look at Wonga’s unfair rates, which clearly don’t have the interests of the SME at its heart, or the claims that the Royal Bank of Scotland deliberately pushed SMEs to the wall, so they could get their assets on the cheap.

So how have SMEs found themselves with these numerous obstacles and what can they do to overcome them and flourish? All aspiring SMEs have the objective to form business partnerships with larger organisations to accelerate their evolution. Yet they have failed before they start, as all too often they are strangled by large inoperable procurement and finance systems.

For a long time, enterprises have demanded all their suppliers adhere to these clunky, inflexible systems. It leaves SMEs with two options – spend valuable time and money adopting the systems that the bigger players insist on, or pass up the opportunity and never realise the goal of working with large organisations. Naturally, the SME often ends up bending over backwards and opting for the first. However, once they are finally on their new partner’s system of choice, they are locked in. There is no reason for vendors to improve the software, so SMEs continue to struggle with archaic, expensive processes. They essentially become prisoners, not suppliers. I know a small business that was being forced to pay $9,000 to send an invoice, or, to put it another way, being forced to pay $9,000 to send a 10 kilobyte email. In today’s social, open world, this is a ludicrous situation.

It’s still happening today, but it’s not just SMEs who feel the pain of this approach. Today, there are so many incredible, innovative start-up businesses that can bring considerable value to an enterprise. However, these larger organisations are missing out on working with these dynamos, which could see their businesses suffer and their competitors prosper. And all because they insist on carrying out business processes “their way”.

What’s needed, both for SMEs and enterprises, is an agnostic approach to communicate better with each other. Connecting on one platform, which removes barriers to business and facilitates better communication, will allow SMEs to build partnerships with their bigger counterparts. It will enable them to do so much more than just get paid quicker. They will be able to create apps to improve processes, transact faster and more efficiently and discover new partners and customers along the way. This will ultimately boost collaboration, increase revenues and improve business bottom line.







Comments: (1)

A Finextra member
A Finextra member 15 June, 2014, 23:41Be the first to give this comment the thumbs up 0 likes

Hi Christian, 

I would only comment that the range of solutions to SME lending spans beyond Wonga like offerings.  Bank products aside, here, in the US, for instance, companies like Kabbage or Cash Access Network offer working capital loans in a very interesting way and, for sure, at a much more affordable rate than Wonga like rate.  Your truth is in 'connectivity' and 'collaboration' aspects of this lending question as you are touching on deeper causes of the issue.  Especially so in your B2B space.  Provision of finance (here, to SMEs) in a way deemed optimal requires that new ‘reality’ (technical, legal, communication standard, custom and other) where distance between suppliers and enterprises is significantly shorter.  In that reality, - product and partner discovery is faster, DSOs shorter, issue resolution smoother, …, collaboration in any form cheaper.  That will quickly promote excess of funds to flow to SMEs.  



Now hiring