Why do SME need extra funds and why should your bank manage such applications?

Banking

Published 31 Jul 2024
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Why do SME need extra funds and why should your bank manage such applications?

SME funding — an immense SME finance gap to be filled

According to the “European SMEs: Filling the Bank Financing Gap” report prepared by Euler Hermes Global, there was a financial gap in 2019, often referred to as the SME finance gap, understood as the inability to acquire funds by small and medium-sized enterprises despite the ability to use them for further growth. The gap value is estimated to reach 400 billion EUR. This is the difference between the needs reported by SMEs and available bank credits. The largest gap was diagnosed in the Netherlands (22% GDP), Belgium (14% GDP), France (9% GDP) and Italy (4%). Enhancing SME finance is crucial as small and medium enterprises play a critical role in job creation and economic growth.

SME funding

Although SME funding is often limited, this sector of enterprises is the major employer on the EU market. Small and medium-sized enterprises operating in the European Union employ more than 90 million people, i.e. close to 70% of the employed in the non-financial EU sector. This means that the limited funds for SMEs mean not only fewer investments but also exert a negative impact on the labour market. Development finance institutions play a crucial role in providing diversified financing options to help bridge this gap. Enhancing SME financing is a critical strategy for economic growth and development, with various innovative approaches and initiatives aimed at improving access to finance for SMEs.

The above gap means high opportunities for the banks offering products dedicated to SMEs. Though the EU programme called COSME for 2014-2020 (offering e.g. credit guarantees for small and medium-sized enterprises) has almost reached its end, the market has still had insufficient funding.

What are the major sources of financial resources for SME and what do they use the funds for?

With respect to the small and medium-sized enterprises operating on the EU market, the major source of funding is external sources as they rely on the funds offered by the banks in 70%. To compare, in the United States the banks ensure 40% funding of SME. According to “SME Access to Finance in the EU Countries 2019” report, the SMEs believe the most important products for their activity include credit lines (51%), financial lease (47%), and bank loans (46%).

Financial inclusion is crucial for enhancing SMEs' access to formal financial services, particularly for underserved populations. By maximizing the number of SMEs using these services, we can address regulatory frameworks and utilize financial technologies to improve access and reduce informality.

sources of financial

What purposes do the enterprises use the money from external sources for? According to the above report, the SME needs are versatile:

40% of SMEs appropriates the obtained funds for investing in fixed assets,
35% for the working capital,
22% for employing new workers and training,
20% for new products and services,
13% for the debt rollover,
9% use the funds in another way.

In addition to traditional bank loans, asset based finance, such as factoring and invoice discounting, provides flexible and rapid access to working capital for SMEs.

As the products offered by the banks are perceived to be of key importance for further development by the European small and medium-sized companies, it is necessary to facilitate their access to these financial resources. Thanks to implementing cutting-edge software, the banks may manage the financing applications more efficiently and thus improve their own financial results.

SME finance — how can a bank manage credit and bank loan applications?

In the traditional model of selling bank products, a customer must visit a branch personally and submit a credit or loan application, and then deliver the required documents to financial institutions. For SMEs, this route is time-consuming and ineffective while the funds are often required almost instantaneously. The bank competitiveness is thus proved not only by the offer comprising the maximum credit or loan value and interest rate, but also the application examination period.

The SME sector is significant in terms of finance and economic growth. However, SMEs face challenges in accessing funding due to their unique financial needs. Strategies to improve financing options tailored to this sector are essential.

To increase the number of customers and respond to the needs of the entrepreneurs interested in SME funding, the banks may implement cutting-edge software. Such a solution is Comarch SME Banking, or the digital banking platform which supports comprehensive service of business customers.

sme finance

Improving financial literacy among SME managers is crucial for better understanding and utilizing the various financial instruments available.

The core of Comarch SME Banking system is the Cash Management & Reporting module designed to ensure cashflow. Customers having access to the system may use it to submit credit and loan applications online. The software enables the bank workers to view the cashflows of the entrepreneurs which may result in eliminating the need to deliver additional documents required to assess the customer’s creditworthiness. In this way the funds for SME may be available almost instantly. The entrepreneurs may apply for a credit or a loan or for opening a credit line any time. They are not dependent on the bank opening hours.

As Comarch SME Banking operates also on mobile devices, the location of the person responsible for the corporate finance management is not important. Whenever required, it is just a few clicks to apply for any financial products included in the bank’s offer from any location.

Not only funds for SMEs — additional services for financial inclusion of a business customer

Although the products offered by the banks are primarily the funding sources for SMEs, the institution may also help their customers manage funds, providing additional fintech solutions to them. Venture capital can also be a critical source of funding, particularly for innovative and early-stage firms. However, many SMEs may not attract traditional venture capital investments due to insufficient collateral and low profitability. They include, not being limited to:

e-invoicing and e-accounting — both issuing invoices and keeping the books of accounts are the everyday chores of entrepreneurs, and a bank providing such opportunities may support its customers when it comes to settlements,
warehouse and e-shop — thanks to inventory checks, the entrepreneur may avoid selling any products not held on stock and thus prevent any compromised image,
payment management — having logged in their account, the customer may order transfers, import and export payment files and process mass payments,
report generation opportunity — reports are created based on selected data and the conclusions drawn from them help to make accurate business decisions,
multi-banking functionality — thanks to it, the entrepreneurs may collect information on the accounts held for them in different banks,
trade finance — supporting SMEs’ participation in supply chains and global markets, enhancing their financial opportunities.

Besides the above functionalities, Comarch SME Banking system also handles cash pooling (a funds management method dedicated to entities belonging to a capital group).

business customer

One of the major benefits for the entrepreneurs using this system is the ability to gather the information on the corporate funds in one place. This facilitates funds management significantly and also enables to apply for funds for SME any time. Thanks to automating many everyday activities required when running a business activity, entrepreneurs may devote even more time to developing their activity, including looking for vendors or creating new services and products.

Flexible software compliant with the security rules

To offer SME funding even more efficiently, the banks must remember to do much more than enable the business customers to submit funding applications after logging in their bank account or using the potential of fintech solutions dedicated to the entrepreneurs. Security is equally important. The Financial Stability Board has established key standards for SME financing, ensuring that regulations align with financial stability and investor protection. Comarch SME Banking is a cutting-edge system using authentication methods conforming to the EU PSD2 Directive (Payment Services Directive) which introduced the strong authentication procedure, i.e. the bank customer’s identity is verified in two steps.

Comarch SME Banking was designed to respond to the users’ needs. For banks, this means flexibility — the ability to start new functionalities or services based on the needs reported by the SME customers.

More about Comarch SME Banking