Why must we do better in financing small business?

It’s probably not necessary to tell this readership group that we really should care about small businesses. Not because there’s anything especially great about being small, but because they are engines of job creation and economic growth. We want them to grow! 9 out of 10 new jobs worldwide are created by small businesses, and we need 600 million jobs by 2030 to absorb the growing workforce. Finance, in particular, is a critical component of growth; yet, nearly half of the small businesses worldwide do not have the financing they need to grow and create jobs.

Closing the financing gap for small businesses has become a policy priority around the world. The World Bank Group has taken on an ambitious goal of universal financial inclusion by 2020. The UN Sustainable Development Goals adopted by 193 member states calls for ensuring access to finance for small businesses. The G20 leaders have also recognised the importance of financing SMEs as a critical piece of economic development. That’s why the SME Finance Forum was created in 2012.

Banks find it particularly challenging to lend to small businesses given the high cost and high risk, what are successful banks doing to make SME finance profitable?

When it comes to small business lending today, the good news is that banks are not only competing with other banks, but also with new players from telecom and FinTech companies; peer-to-peer lending platforms; and technological giants such as Apple, Google, or Amazon. Business Angels are also playing a more and more important role – particularly for young firms and very small firms with ambitious growth plans. The classical banker’s approach to lending – based on consumer or corporate methodology – is too fixed on collateral and doesn’t work well for SMEs – particularly as it is practiced in the larger banks.

No matter how much we like Business Angels and other alternative financiers, we need banks to do a better job. The good news is, some banks are starting to do better. They are challenging the old methods and finding new ways to make SMEs more “bankable”. For example, a small but growing vanguard of banks is leveraging data mining technologies to lower cost and risk in small business lending. Wells Fargo has demonstrated the potential of such a data-driven approach for over 25 years; having mined its own transactional data as it morphed from a regional institution into a national one.

Each time small businesses and their customers use cloud-based services; conduct banking transactions; make or accept digital payments; browse the Internet; use their mobile phones; engage in social media; get rated online; buy or sell electronically; ship packages; or manage their receivables, payables, and record-keeping online, they create and deepen the digital footprints they leave behind. A rapidly growing group of technology-focused banks are using these new sources of digital data to make credit and underwriting decisions; and by doing so can offer more tailored solutions for their small business clients. The small business segment consistently ranks among Wells Fargo’s highest-margin client segments. Even the most successful smaller and emerging market banks are now going well beyond their own community relationships. Many banks are also not only relying on their own IT departments, but are acquiring or partnering with established FinTech firms to leverage the best financing innovations.

While the use of data creates new opportunities in small business lending, it also brings new challenges. There are new issues of what to use, how to use it, and how to do this responsibly — while also respecting customer privacy and ensuring data security.

How is the SME Finance Forum working to accelerate financing for small businesses worldwide?

Created by the G20 and managed by the International Finance Corporation, the SME Finance Forum works to expand access to finance for small and medium businesses by improving the capacity of the finance industry. We have a global membership network that brings together a wide range of financial institutions, technology companies and development finance institutions. Our membership includes small, medium and largesized banks; as well as many types of non-bank financial institutions, such as leasing companies; crowdfunders; P2P lenders; and a range of other non-bank lenders. We also have development banks and FinTech firms as part of our membership – both alternative financier and more service provider (SAAS) types. Our growing network currently counts over 130 organizations from more than 50 countries. We help members to learn from each other, link to new business opportunities, and lead the industry’s policy dialogue; with key decision makers in the G20, APEC, the OECD, the World Economic Forum, and other important international bodies.

We don’t have any individual Business Angels as members yet; and I don’t expect many will find it sensible to pay $5,000/year to join us, when that money could be used in their next investments.

However, our members’ dues support many public domain services, such as our website (www. smefinanceforum. org) and our LinkedIn group. Here, Business Angels can find a wealth of free documents, data and dialogue; and they can share their experiences with our large international audience. Non-members can also attend our public meetings, such as the annual Global SME Finance Forum – which takes place in Madrid this year, 4-6 November.

All the latest information and registration instructions can be found at: www.smefinanceforum.org.

This article appeared in the Angel Investor Review, where SME Finance Forum CEO Matthew Gamser talks about the growing capacity of the finance industry to finance SMEs, and the role that the G20 SME Finance Forum is playing to accelerate growth for small businesses.