The Centre for Finance, Innovation and Technology (CFIT) and its industry partners set out how they plan to tackle the United Kingdom’s small- and medium-sized enterprise (SME) credit gap, as part of a new coalition developing technology-driven solutions to help those small businesses which are hesitant in applying for finance.
SMEs make up 99.8% of all UK businesses, yet their growth is hindered by a financial system that doesn’t meet their needs, discouraging them from seeking the additional capital they require to invest and scale.
This sector-wide initiative with blue-chip industry players, including Mastercard, Lloyds Banking Group and HSBC, will explore how commercial credit data is shared and utilised. The coalition will focus on the UK’s 5 million businesses with 3-50 employees, particularly those in economically challenged regions, where demand for external finance to support growth is greater than elsewhere in the country. By using alternative data sources, the coalition can develop and build smarter lending models that provide both SMEs and lenders better insights into their financial health.
A recent study by British Business Bank revealed that 60% of SMEs who don’t seek finance are unaware of the options available to them, while research from Small Business Economics demonstrates that 72% say that a past rejection has deterred them from applying for finance again. This lack of knowledge and scepticism about their ability to secure credit is a key factor in the weakening demand for finance – a trend reflected in the 20% real-terms decline in SME lending over the last decade. This limits job creation, tax revenue and the country’s overall economic prosperity. The UK Government’s own analysis has shown that 70% of SMEs would rather grow slowly than take on added debt.
To address these issues, the coalition will use real-world insights to show how alternative indicators, enabled by technologies like Open Finance, could improve lending decisions and build confidence among small businesses.
Loan application data, including credit information, will be overlayed with alternative transactional data, such as cash flow, income, payment history, spending patterns and business performance over time. This additional data will be used to assess whether rejected applications could have been approved under different circumstances. The alternative data indicators, which may have otherwise been overlooked by traditional lending models, are expected to provide a more holistic understanding of an SME’s creditworthiness, going beyond the standard metrics of credit scores and balance sheets.
The coalition will also undertake regional analysis, identifying the regions where there are opportunities to improve access to credit.
The coalition will then create a user-friendly dashboard that consolidates all the key data points, giving SMEs a holistic view of the factors that influence a lender’s credit decisions, to help them better understand their finances and improve their future chances of accessing credit.
