By: Gabriele Sabato, Co-founder & CEO of Wiserfunding
Today’s consumers are well acquainted with their personal credit scores. The same can’t be said for the average small business despite the fact their credit profile is equally important to that of an individual to qualify for a credit card or take out a mortgage. Few owners and directors understand that the credit profile of their business is, in fact, critical to profit and growth or know that tools used by financial services can help manage risk in their operations.
Too often financial technology is an overhyped solution looking for a problem. Transformative fintech tackles real-world challenges with business-led solutions, factoring in the day-to-day implications of credit risk, for example, to build tools for better management. Against that backdrop, unequal access to credit risk assessment between banks, businesses and consumers is both a technical and cultural problem looking for meaningful solutions.
The United Kingdom alone has some 6 million small and medium-sized enterprises (SMEs), making up 99% of all British businesses, of which 15% face insolvency. It would be misguided to take the upward revision to the most recent quarterly economic data, now a record 5.5% growth from April to June, as a signal the economy is on track for a wholesale recovery anytime soon. Compounded by the end of furlough and a potential interest rate rise from the Bank of England, the UK can expect to see a huge increase in insolvencies, down a historic 25% since 2019.
Business ‘zombies’ have been artificially kept alive and solvent by taking on debt alongside Government pandemic support, threatening to trigger a wider domino effect across the economy, as they start to fail now the support is withdrawn. As many as two out of three businesses were initially expected to default on COVID-19 bounceback loans, although this precicition is yet to be realised, in part due to macroeconomic conditions beyond the control of businesses or policymakers. Recent reports still estimate a £5BN cost to taxpayers in bounceback loan defaults every month and the Office for National Statistics expects £21BN of £80BN in Government-backed loans to never be repaid. Since September, the Institute of Directors has warned of a dramatic deterioration in business confidence in particular from small business leaders across the UK.
Technology-driven transformation of financial services, from consumer credit to the cloud, provides a blueprint for fintech that can bolster the overall health of a business through risk assessment and, by extension, that of the whole economy. Insolvency is a reality even in periods of economic growth. The challenge is not to save the ‘zombies’ but to contain the fallout and domino effect that would hamper the post-pandemic recovery.
Following furlough and emergency loans, financial services must deploy capital and lend responsibly to revitalise the economy, the only sustainable debt and equity solution for both public and private sector growth. How effective private capital is with the extension of credit and investment to healthy businesses will have a significant impact on the size, shape, and speed of the recovery. Yet spotting differences between ‘zombies’ and viable but indebted businesses, where over half of SMEs took on pandemic loans, is a historical anomaly that models alone don’t solve and fintech can remedy.
Lenders and investors must carefully distinguish between ‘zombies’ and businesses that have been weakened by the pandemic but can thrive long-term. Zombies, saddled with debt and no path to recovery must not be propped up artificially any longer, and must be allowed to fail, leaving room for fresh shoots to create growth alongside those that took on pandemic debt to survive the downturn and today may still need working capital to ride the slow but steady economic recovery. Unlike the financial crisis of 2008, banks are today better equipped with new technologies, yet there is still much to be done for lenders to transform their business models and services.
Digital solutions provide fast, fair, and efficient ways to assess risk and deploy credit. Technology can save viable small businesses, most of which have fewer securities relative to large corporations. Due to the perceived risks, small businesses are more likely to pay higher interest rates, which only compounds the debt burden and contributes to a higher rate of failure. The Bank of England is right to call for the financial industry to play its part, banks with upgraded technologies and processes and alternative investors with record amounts of dry powder are well placed to do so. However, many have only begun to scratch the surface of what is needed in their tech stacks. Fintech can identify and support lifelines to businesses in immediate need, not zombies on death’s door.
Now is the time to ensure all financial institutions are properly equipped to make the right credit decisions, facing the challenges ahead with every available capability. Equally, business leaders – not just of FTSE 100 companies – must manage exposure to zombies and understand their businesses’ credit profile is as important as their personal credit score. Businesses themselves, rather than just banks, must have visibility of risks to their own balance sheets, where assessing the financial viability of partnerships and supply chains, for example, would pose a significant burden on too little resource if not for fintech.
Creditworthiness is in constant flux. In fact, almost all business decisions should be taken with a view of risk and fintech can facilitate visibility. A business credit profile impacts everything from the cost of insurance and loans, to ability to take on investors, debt, and equity, so the right technologies are nothing short of business-critical. Taking one example, cashflow issues are well-established as one of the biggest threats to SMEs. In recent years new fintech platforms have provided ways to mitigate risk, including credit risk tools and solutions that reduce payments uncertainty.
The transformative potential of fintech across the economy, both existing and future innovations that solve pain points for SME owners and managers can truly play a meaningful role in the pandemic recovery. Fintech can enable robust companies to survive the zombie apocalypse and drive wider economic growth, if solutions are developed contextually for these unique circumstances.