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Small and medium enterprises (SMEs) represent the economic backbone of most developed and emerging countries. Yet they face a number of hurdles in acquiring loans/credits and financing from traditional financial institutions. Thus, access to finance is a critical barrier for SMEs to start, sustain and grow their businesses. For lenders, information asymmetry on the financial and credit data of SMEs, leads to their high lending interest rates and higher rejection rates of loan applications by SMEs. Many SMEs do not have reliable financial statements and/or are unregistered and have no official documentation when compared to large enterprises, making it difficult for financiers to appropriately evaluate and monitor credit risk.
This use case profiles how streamlined loan programs targeting SMEs can support access to financing for SMEs, and address information asymmetry and collateral requirements in lending markets. Digitization in this use case can range from the use of alternative data sources and big-data analytics to facilitate credit risk-assessment processes for SMEs. It can also mean the use of fintech solutions to facilitate SMEs access to financing i.e., digital credit and equity products such as loans, marketplace lending, and/or equity crowdfunding.
Ministry responsible for Finance and SMEs
Public central banks and financial intermediaries
Investors, private equity, venture capital or angel capital business associations
Chamber of Commerce and/or institution in charge of business or credit registries
Small and medium enterprises (SMEs)
8.3: Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation, and encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services.
8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all
The Ministry of Finance and/or the Central Bank/public financial institution coordinate on targeted efforts to strengthen SMEs access to traditional or mainstream financial services and products. These public authorities can liaise with private sector players - commercial banks etc., private equity, venture capital or angel capital business associations, on best approach - methods and tools to facilitate SME financing.
Certain countries have implemented SME credit guarantee schemes, where a government body/ministry stands as guarantor for eligible SMEs applying for loans. As banks will be more willing to provide a loan to SMEs if that loan is partially guaranteed by the government. This credit scheme increases the SME’s collateral and thus their financing options. Another example is lending to SMEs through a factoring platform. Factoring is a financing product that allows a financial institution to provide financing to an SME supplier through the purchase of its accounts receivable or invoices (“receivables”). In factoring transactions, the SME supplier is the client of the financial institution.
Workflows
Coordination to have an agreed form of coordination, communication and collaboration between public and commercial financial institutions.
Education for educating and training all relevant staff on use of digital solutions and any guarantee scheme programs to facilitate credit lending to SMEs.
Content management for content development of technical and nontechnical guidelines.
Building Blocks
This step entails launching an awareness campaign about a new loan program initiative targeting SMEs. Information on the program, which SMEs are eligible and processes to obtain the credit loan are disseminated through all sources of media - television, radio, SMS, email, and social media platforms.
Targeted outreach can also be done via existing databases and registries of operating SMEs in the country. These SMEs should be encouraged to digitize all their internal and business-to-business (B2B) processes on their business activities and cash flows - this will facilitate the automation of credit-risk measurement and monitoring that lenders value.
Workflows
Client communication to facilitate clear information and communication on processes to apply for credit and loans targeting SMEs.
Client education for educating target users/audience on the objective(s), benefit(s), process, guideline etc.
Content management to disseminate relevant educational and promotional content that local loan officers can use at banks, financing institutions etc.
Building Blocks
Registration is the process of collecting information on potential SMEs seeking to apply for financing and go through a credit approval process. This is in order to gather all the necessary information needed for assessment of their needs and conditions. Depending on the specific country context, registration may occur by leveraging an existing business registry database - national SME business registry to acquire all information the lending financial institution requires to assess a loan application. During this process, the business entity's information is collected (type of enterprise, business model, financial documents, collateral etc.) as a prerequisite in assessing their eligibility for a particular loan/ financing scheme.
Workflows
Data Collection and Reporting for capturing data of SME business entities.
Identification and Registration to be able to identify the SMEs.
Client Case Management for creating business entity user records.
Data verification and validation should be coordinated with all relevant authorities and participating lending financial institutions. The SME registration data that is submitted can be checked against other credit institutions and government databases (e.g. chamber of commerce business registry, etc.) to fill in any missing gaps, verify and validate collected information, including authentication of all records.
Workflows
Client Case Management for storing and reviewing identification, registration, and SMEs credit scores and financial information.
Data Analysis and Business Intelligence for cross-referencing and verifying records across multiple registry sources, and reconciling gaps / overlaps.
To be eligible for the SME credit guarantee scheme or any public funding scheme, SMEs have to fulfil specific conditions. Eligibility conditions must be very clear and accessible. Certain countries even include questionnaires that interested parties refer to/ have to complete in order to find out if they are eligible for a loan credit support scheme. These conditions could include requirements on where the business is established, number of employees, years the business has been in operation, annual revenue and balance sheets, revenue thresholds, etc.
For example, in the case of a government credit guarantee funding scheme - where a government body acts as guarantor for eligible SMEs, a list of the banks and funders that have agreed to this funding scheme with the government body, is available on websites and relevant social media platforms. A special dedicated web portal can be made available for SMEs with all relevant information on the eligibility conditions and application processes for each participating funder.
Workflows
Content management to disseminate information of eligibility criteria.
Identification and Registration to identify eligible SMEs that meet the criteria.
Client Case Management for storing specific data and tracking SMEs interested in applying for loans as well as those eligible.
Building Blocks
This step entails the application process for SMES to apply for a loan. SMEs can be required to complete a form online and submit all required documents pertaining to the financial situation of their business (turnover, assets, business activity, collateral information, credit information, outstanding loans etc). In most cases, the representative from the SME will have to schedule a consultation and interview with a loan officer at the financial institution to discuss their loan application. In certain countries, banks have an obligation to provide SMEs with a standardised credit report and with their credit rating, based on a common methodology.
For example, with countries implementing the SME Credit Guarantee scheme for SMEs, the eligible SMEs does not apply directly for the SME Credit Guarantee scheme via the government body guarantor. Instead, the SMEs directly applies for a loan from one of the participating banks or other funders collaborating on this scheme. It is the bank that reviews the SMEs application and then coordinates with the national body acting as the guarantor.
Workflows
Client Case Management to track, review and process all submitted loan documents. Also, to respond to any inquiries and provide updates on the loan application decision.
Data Analysis and Business Intelligence to analyze all submitted data and ensure they meet the eligibility criteria.
Building Blocks
Loan issuance takes place once the submitted loan application has been reviewed and approved. If the application is approved, both parties sign a contract that outlines the details of the agreement. First, a notification is sent to the applicant informing them that their loan has been granted with the contract that provides information on loan agreeement, collateral details, date when amount is available in the SME borrower's account, loan interest rate, and the length of time before repayment is required. The terms of the loan has to be agreed by each party before any money or is disbursed.
Workflows
Data Collection and Reporting for capturing and tracking all approved loans and informing all relevant authorities of approval decision.
Client Case Management to communicate approval decision to the applicant and coordinate loan allocation as well as payment plan and processes.
Building Blocks
Should an SMEs loan application be rejected, it is crucial to have an effective case management system in place. Some countries have put in place credit review offices, providing a credit appeals process for SMEs. The credit review office is meant to help SMEs who have had an application for credit of up to a certain amount, declined or reduced by participating banks, but feel that they have a viable business proposition. It also looks at cases where borrowers feel that the terms and conditions of their existing loan, or a new loan offer, are unfair or have been unreasonably changed and causing harm to their business.
Workflows
Client Case Management for identifying and recording SMEs appeal request for a loan decision - capturing reported cases on grievances / appeals etc., and for determining risks / conditionality by reviewing individual client case.
Work Planning and Coordination to communicate with the relevant banks about their loan decisions and ways to address grievances together.
Building Blocks
Wesley Brown, GovStack Product Owner, Digital Impact Alliance
Sarah Farooqi, The Exchange Product Owner, Digital Impact Alliance
Sainabou Jallow, Business Analyst, Digital Impact Alliance
Margus Mägi, GovStack Project Lead for Estonia
Dr. P. S. Ramkumar, GovStack, International Telecommunication Union (ITU)
Farina Owusu, Junior Advisor, Global Programme Digital Transformation at GIZ
Meelis Zujev, GovStack, Estonia
Name
Inclusive Financial Services for SMEs
Sector
Finance
Version
1.0
Status
Published