The Future of SME Finance Post Covid-19
Zitah McMillan is the CEO and Co-founder of Predictive Black, an innovative technology solution that is transforming financial forecasting for SMEs. Zitah talked to NorthRow about the challenges involved in SME financing, paying back government backed loans, the rising levels of fraud and money laundering activities and what lies ahead for the industry in 2021. Here is what Zitah had to say.
What are the key challenges facing SME finance?
If you’d have asked me this question before the pandemic, I’d have said access to funds is absolutely the biggest challenge for SMEs. However since Covid-19, and the implementation of the government-backed loans by the British Business bank, this isn’t solely the case.
At the start of the pandemic only the larger traditional lenders had access to the government loan scheme and were taking weeks to approve the CBILs loans, forcing many SMEs into liquidation.
In that time, we looked at how SMEs were funding themselves and what we found, in every sector, was a huge reliance on overdraft lending to finance themselves, which is the most expensive form of lending they could possibly go for.
With the introduction of the BBLs small businesses were provided with easier access to cheap debt from the Government. Whilst this was a quick fix many businesses have now exhausted these funds. We will have to see a continuation of government-backed loans for many SMEs to survive, otherwise we will see many starting to fall back on their overdraft.
There are many businesses that rely heavily on physical footfall which isn’t happening owing to Lockdown 3.0. It will be these businesses that will need further access to funding – whether it be in the form of further government-backed schemes, delay of repayments or through other lending channels in order to fuel their cash flow.
What will happen when the loans need to be repaid?
With the latest 2021 lockdown announcement, there’ll be many small business owners, particularly at the lower end, having to make some difficult decisions. If I can’t open my shop and maintain footfall, where does that leave me? And maybe they can survive to the end of the quarter but maybe they can’t.
Predictive Blacks scenario planning functionality allows them to tinker with the numbers just to see the ‘what ifs’. You know, ‘what if I made a little bit more this week’, ‘what if I paid that debt a bit later’?
With many businesses hamstrung by lockdown and reduced income revenue this will have an inevitable impact on the ability to repay the loans. This debt crisis could be pushed further out which will only prolong the inevitable for those businesses that were already struggling before the pandemic hit. Only the fittest will survive.
There will be a balancing of figures for the Government – keeping unemployment as low as possible versus keeping only the viable businesses going. We need to think about what it would cost from a taxpayer’s perspective as well, if more people claim unemployment and additional benefits. So I think probably the scales are a little bit more equal than most of us would imagine.
The road back to ‘normal’ will be a long one – the journey doesn’t come to an end once we are out of lockdown. Businesses will need a longer term strategy to build their reserves in order to withstand future crisis.
From a more positive perspective – out of a crisis we often see a burst of creativity. Looking back to the 2008 financial crash, we saw a host of FinTechs rising from adversity, to innovate and move the economy forward. Something similar will happen again – We’ve already transitioned and brought digital transformation forward with the ability to work remotely and increase our ability to transact online. Even at the moment of maximum uncertainty in March, some companies were prospering as can be seen here.
Increase of Fraud from Government-backed loans
In the scramble to contain the economic disruption caused by the pandemic, traditional lenders often prioritised speed over the usual robust client due diligence processes. Many lenders left their systems open to fraudulent activity from organised crime groups, opportunistic individuals and identity fraud in general.
As a result, the UK Government faces a potential loss of up to £26 billion, either through legitimate businesses not being able to repay the loans, or through widespread fraud, according to the latest National Audit Office (NAO) report.
It won’t be long before the first loan repayments will be requested. Those businesses struggling with their cash flow will look to acquire further lending and RegTech firms such as NorthRow, a leading SaaS compliance solution for organisations to deliver Know Your Customer (KYC), ongoing client monitoring and remediation processes, will come into their own in providing the lenders with access to the right tools to ensure timely due diligence can be instigated to prevent a repeat of the high levels of fraud.
How is Open Banking Transforming SME Finance?
Open Banking has already transformed the landscape for SMEs. We’re fortunate to be starting to work with some lenders and are keen to get more on board, in particular to support their due diligence process and ongoing client relationship management.
The benefit of using Open Banking for SME finance is that you get a faster lending decision, whilst the benefit for the lender is they get access to the financials, both accounting and open banking without the need for much in the way of ‘human contact’. There is less interference so the open banking activity is so much cleaner and pure as you just have the API.
The Open Banking community is extremely supportive if not a little geeky! Our FCA authorisation took time and led me further into the Developer realms than I anticipated – but even I got hooked! It’s a great piece of intervention to enable competition and from my perspective, it’s working.
In my view, Open Banking access should continue to make life much easier for SME finance once the transparency hurdle is overcome. Once businesses fear it less and see the opportunities and benefits of accessing instant financial data to know their real-time cash flow position it will be great. I’m already thinking ahead to the Open Communications initiative
Tell us more about Predictive Black
I founded Predictive Black in 2019, along with Mike Valadakis, Predictive Black’s Chief Financial Officer, and Chris Young, our Chief Strategy and Product Officer. We came together with a shared ambition to truly level the playing field for SMEs so they can effectively manage their financial future and risk.
Coming from a family of entrepreneurs who have started their own businesses, I understand the challenges of running a small company and what it takes to survive. The problem for many businesses owners is making sense of the vast quantities of data out there and then knowing what data points are important to understand their effect on revenue, costs and cash.
At Predictive Black we want to make big data work for SMEs so they can make better financial decisions tailored to the sector they operate in. We have built a software solution to do just that. Our proprietary service uses machine learning and artificial intelligence to aggregate and compute over 2 billion, (and counting), data points so we can provide predictive views across revenue, costs and cash. We bring together data from sources such as ONS, Bank of England, OECD, ECB, Companies House, HMRC, Dept for BEIS, and Eurostat, that allows us to build an accurate and realistic financial picture of every business sector in the UK.
Our industry analysis underpins what we offer to clients, which is predominantly focussed on cash flow forecasting and accurate cash visibility. By taking their open banking and accounting data and merging it with sector data, we provide a forecast of their cash position over a specified time period. It’s incredibly powerful data for decision making.
If you want to learn more about how Predictive Black is transforming SME financial forecasts visit www.predictive.com.
If you would like to learn more on about NorthRow is innovating SEM compliance verification and ongoing monitoring, please do not hesitate to get in touch with a NorthRow team member.