What accountants need to know about the revolution in lending to SMEs

Before the financial crisis in 2008, small businesses traditionally relied upon high street banks to provide their financing. Since 2008, the market conditions and increasing regulatory requirements have meant that banks are increasingly cutting costs. The most obvious example is bank branch closures.

The way traditional lenders judge risk has also changed – banks are simply not able to fund many smaller fast-growing businesses. SMEs are growing increasingly frustrated that 10 years on, banks are not able to adapt to a changing lending landscape.

It is in this context that specialist SME lenders such as ThinCats are starting to fill these gaps with innovative funding solutions. Using funding provided by long-term institutional and other patient capital investors ThinCats is helping to drive competition, making the market more diverse and accessible funding for these businesses.

The critical role of accountants

In many ways, this is fantastic news for SMEs because they now have a huge list of options to pick from. On the other hand, new reports show that SME owners are still unfamiliar with these new services, so they don’t apply for finance through these new channels. Too often if a business applies to its bank for funding and is declined, it doesn’t look any further and gives up. This is where accountants come in – they have a critical role to play.

With a birds-eye view of the business and specialist knowledge, accountants are increasingly becoming the first point of call for SMEs seeking funding advice. They are uniquely positioned to cut through the noise and find flexible and secure funding options for their clients’ businesses.

There will never be a one-size-fits-all, but the innovations in technology, (particularly with machine learning) are increasingly helping accountants prepare for the demands of such change. Tech should allow accountants to be proactive not just reactive, able to assess the credibility of a creditor before advising their business.

For example, at ThinCats, we have introduced two pioneering data models that can help accountants identify new business opportunities:

PRISM Risk is used to give early indication of our credit appetite and pricing of a business loan. The model combines market and company financial data with proprietary non-financial data to provide a credit grade from 5 stars (strongest) to 1 star (weakest). The model also provides a security grade for each loan taking into account balance sheet assets and certainty of future cashflows.

PRISM Prospect identifies the likelihood of a business to have a funding need over the next 12 months. While PRISM Prospect has obvious benefits for ThinCats in terms of identifying potential borrowers, the model also shows that companies with stronger growth characteristics generally have a higher propensity for funding. ThinCats has found that these companies are typically underserved by traditional lenders.

Using the insight from the PRISM models, we have developed a partnership programme called Business Lynx to help accountants take a more proactive approach to identifying companies that may require their advice services.

Feedback so far from accountants has been positive and we plan to develop new ways to use our data skills in our mission to give UK SMEs access to better funding solutions.