Linking strategy

Mambu: 67% of SMEs unable to obtain sufficient financing; leading to weak job creation

Small and medium enterprises have been one of the many casualties of the pandemic. While SMEs were thriving before the pandemic, the lack of a digital storefront and digitization strategy set them back. Another thing that has halted the progress of a number of small and medium businesses during the pandemic is the lack of funding.

A new report from the Netherlands-based cloud banking platform Mambu shows that more than two-thirds (67%) of small and medium-sized enterprises (SMEs) worldwide have been unable to secure sufficient or non-existent financing on at least one or more occasions. The report shows how loans to SMEs could become a major obstacle to economic development and job creation.

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Small Business, Big Growth Report: What You Need to Know

the Small Business, Big Growth Report is an annual survey by fintech platform Mambu that sees the participation of over 1,000 SME owners worldwide. This year’s report, in particular, paints a grim picture of how SMEs have struggled to secure finance since the pandemic. The report shows that 32% of SMEs that launched since the pandemic and 33% of launches quickly struggled to obtain start-up capital.

This is more than 28% of SMEs launched before March 2020, which translates into an increase of 17.5%. SMEs represent approximately 90% of businesses worldwide and employ more than half of the global workforce. According to the World Bank, formal small and medium-sized enterprises (SMEs) contribute up to 40% of the global domestic product (GDP) of emerging countries.

SMEs are thus recognized as the backbone of the global economy and their inability to raise sufficient funds could disrupt job creation. “SMEs are the engine of the global economy and are responsible for growth, job creation and post-pandemic recovery. But they face great challenges. Access to external financing has become difficult during the pandemic due to record demand for financing and increased friction in the lending process,” says Eugene Danilkis, CEO of Mambu.

In August 2020, McKinsey reported that 70% of European SMEs have seen their revenues drop due to COVID-19. Research by Mambu shows that 15% of SMEs started trading after being furloughed or laid off due to COVID-19.

Dependence on family and friends for business loans

The report shows that almost half of small business owners have turned to personal networks for their business. Nearly 43% of SMEs surveyed by Mambu globally revealed that they had used funds from friends and family to help them start their business and this number rose to 57% among SME owners in Indonesia.

In all the countries studied, except Germany and Sweden, the main source of financing for SMEs was friends and family members. Business partners and digital-only banks emerged as the main sources of funding in Germany and Sweden.

The study also shows that 48% of soon-to-be-launched SMEs were at least partially funded by friends and family. The report shows reliance on family and friends for business loans increased by 11% during COVID-19.

Short-term loan and other sources of financing

The study also shows that short-term loans were the most popular source of external finance, with more than a quarter (26%) of SMEs started in the past five years taking out a short-term loan for their business. This is followed by start-up loans at 25%, business lines of credit (22%) and business term loans (22%).

Mambu’s research also shows the disparity between SMEs funded by unsecured and secured loans. The report shows that 32% of businesses funded by unsecured loans are likely to take out short-term loans, while that number drops to 25% among those funded by secured loans.

Besides friends and family, other main sources of income for SMEs included traditional banks, building societies/credit unions (30%), personal funds (28%) and business partners (27%).

Obstacles encountered by SMEs in obtaining funds

Research shows that 30% of companies attribute the lack of start-up capital as the biggest obstacle when trying to obtain capital. This is followed by too much paperwork and administration in the loan process at 28%, and cash flow is not considered strong enough at 27%.

SMEs also cited slow loan speeds (26%), arduous application processes (25%) and rigid loan criteria (25%) as some of the barriers. This inability of SMEs to obtain financing had made it difficult for them to scale up their activities and remain competitive.

Of the SMEs surveyed, 35% said they encountered cash flow problems, while 33% were unable to launch new products. The report further shows that 33 percent were unable to hire effectively. According to Mambu’s research, these problems and cash flow being one of the main obstacles, SMEs find themselves in a “vicious circle of decline”.

Inability to hire or grow

Mambu’s Small Business, Big Growth report also shows how the big quit that saw more than 24 million people leave their jobs in the US between April 2021 and September 2021, is linked to the inability of SMEs to raise financing. adequate. Nearly a third of SMEs (30 percent) indicated that reduced access to finance has hampered their hiring plans.

Among large SMEs, with 101 to 250 employees, nearly 40% of respondents said they had reduced their hiring capacity. This was followed by scaling or paying for upgrades or enhancements at 36%.

Alternative loans to overcome these obstacles

In order to overcome the above barriers, SMEs are considering alternative loan options such as challenger banks and fintechs. Of the SMEs surveyed by Mambu, 92% said they were open to switching lenders to a different or simpler digital medium.

The report also shows that two-thirds (66%) of SMEs launched after March 2020 and those expected to launch in the immediate future consider digital services an important lending consideration, compared to just 53% of SMEs launched before March 2020. .

“It’s no surprise that SMEs are ready to jump ship for better and more accessible services. If lenders want to stand out, they need to transform and modernize their financial experiences to ensure SME success; this includes faster onboarding and loan decisions, harnessing the power of the cloud, and offering mobile and digital products,” adds Danilkis.

Financial institutions: what can they do?

The study also shows that SMEs expect financial institutions to do more to tackle the difficult loan application process. When choosing a lender, the duration of the loan application has a major influence on SMEs and a short application process was among the top three considerations.

The majority of SMEs also expressed interest in faster processing of loan decisions (79%), more flexible loan terms (78%), tailored offers and services (76%) and weak or non-existent guarantees (75%).

Richard Lim, CEO of Retail Economics, says: “The pandemic has introduced huge changes to the way we work, play and shop, accelerating the democratization of digital and with its repercussions still rippling through society. But access to capital is an area where digitization has matured much more slowly. Too often, companies looking to scale quickly and seize opportunities are stifled by grueling application processes. Suffocated by slow and inefficient practices, current lending practices no longer fit in today’s rapidly changing digital world. »

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