By Bruno Gremez, Co-Founder of Fincluziv, Smartfintex and CT&F, ex-ABN AMRO and BNP Paribas.
I read recently a very interesting article published in Business Matters, a UK publication for SMEs. The article described a number of transformations experienced by the financial sector in recent years with the so-called FinTechs and explained that these changes were gradually translating into a number of advancements that are improving the way small entreprises can conduct their business and get access to financing.
I will summarise below these main changes and insist on one particular improvement that can, and should, revolutionise the way small businesses fund their growth.
The first of these improvements is the increased transparency of small businesses. With the help of digitised payment recors and supply chains, SMEs can more easily document and maintain their financial books. That only improves their transparency and eventually reduces the asymmetry of information between potential lenders and SMEs.
A second improvement is derived from the ease and cost of effecting and receiving payments. The likes of PayPal have in recent years brought to the market affordable and convenient payment solutions. These solutions can help SMEs save time and a lot of money when dealings with payment flows.
FinTechs translate into a third improvement. The digitisation of lending through online platforms means that the customer experience greatly improves at every stage from the loan application, through the loan processing and the loan approval and disbursement. This reduces the time and the complexity of applying for any loan.
A fourth improvement is derived from lower international transfer costs. Any small entreprise doing business overseas, which is the case of a vast majority of companies in an open economy like Dubai, incurs huge costs due to transfer charges. Next to transfer charges, conversion rates often translate into huge costs for the business.
The last, and to my view, most important improvement brought by FinTechs for small businesses is what Business Matters calls the shift towards cash-flow based lending. Traditional banks rely on collateral in order to grant credit. The problem is that many banks around the world have a narrow definition of what they consider as acceptable collateral. Traditional banks often prefer to get security over immovable assets. The problem is that start-ups usually have working capital, i.e. short-term liquid assets used in their business, and no fixed assets.
I have met countless SMEs in Dubai that experienced that issue when they approached traditional banks. While most SMEs need credit in order to fund part of their inventories and receivables before those are converted into cash a few weeks later when they are sold to customers and when cash is eventually collected from customers, banks require mortgages on some fixed assets, or worse, cash collateral in order to open a credit line.
FinTechs are gradually bringing improvements on that field too by carefully granting collateral value to some short-term liquid assets in order to enable SMEs to get access to short-term finance, meet their immediate funding needs, and grow their business. That may be the most needed (r)evolution expected by the SME community in thriving economies like Dubai, where they contribute close to 50% of the GDP but represent less than 5% of the balance sheet of traditional banks.