November 16, 2016
While accessible consumer credit options have been widely expanded with financial technology startups to the extent of not being a major problem, accessible business credit is still a tough question. According to the World Bank, 200 million businesses globally are unable to get the credit they need, both for working capital and for investments. The estimated global credit gap exceeds $2 trillion. These credit constraints are most acute in low-income countries, where nearly half of small businesses cite lack of access to finance as a major barrier to growth.
The problem wouldn't be so severe if it wasn't for the scale of SME industry – up to 95% of all firms globally are falling into that category, making them an integral and crucial part of every national ecosystem. SMEs drive economic growth and create millions of jobs.
Meanwhile, financial institutions are constrained by risk management requirements and are mostly unable to find a balance between favorable and enabling rates and failure risk mitigation. High operating costs of lending to small businesses and high complexity at a low scale of those businesses disable the financing option. Some estimates from WEF suggest that the median operating cost of lending for micro and small loans in developing countries is 18 cents per dollar lent, 2X–3X as high as one could expect this business to cost in advanced markets.
Advanced markets, however, are not a benchmark either. In the US, for example, SME loans as a percentage of all bank business loans fell from 35% in 2013 to 24% in 2014. In the Eurozone, borrowing costs for SMEs as spread over larger loans increased by 150%.
While $2-trillion-dollar gap seems vast, FinTech has a shot at reducing that g ...