[Editor’s note: This is a guest post from Geoff Miller, CEO of GLI Finance Limited. GLI Finance Limited is a platinum sponsor and will be in attendance at LendIt USA 2015 on April 13-15. In this post, he talks about cheaper SME finance.]
As a leading investor in the SME alternative finance space globally, I am often asked about the most exciting new platforms that I am seeing, and there are some innovations still emerging, and certainly new frontiers being explored, which would feature in my answer. However, from my perspective the most exciting new development in the SME finance world is the seismic shift in the way in which companies will in future interact with their financiers. The opportunity is there for platforms old and new to participate, and it will take time to become pervasive throughout the sector, but as it does so, the basis on which funding is provided will alter forever.
Before I explain, think back (for those of you whose professional careers stretch this long) 20 years, to the days when the internet was something that people wrote books about. In those days we as individuals shared almost no information about ourselves with any financial institution without trying to finesse it slightly. It wasn’t necessarily a lie, but we may omit the bad stuff and make sure we put in the good stuff. This was all fine, because nobody could really check what you were up to and in any case finance companies would price in the fact that no one is 100% honest when it comes to a finance form. Roll forward 20 years and now finance companies can cross check from any number of sources exactly what your status is, and dynamically price not for the generic risk that you are probably lying but for the specific fact that you have actually lied to them.
We accept this as it allows those of us who lead straightforward lives to avoid paying for the excesses of the more extravagant in society. This is most obvious in areas such as car insurance, where you can opt to have your driving tracked and your insurance priced accordingly, but it is gradually seeping into other areas of finance.
We as individuals now accept that our lives are lived in a world in which institutions know our every move. They track every aspect of our lives, what we spend our money on and what our propensity to do almost anything will be. We share this information in the hope and expectation that it will lead to a positive benefit, from money off groceries to upgrades on airlines. We open up our lives to information gathering but expect something in return.
This brings me back to the subject at hand, the financing of SMEs and how this is changing in the modern world. Thus far, it has to be said, not much has changed from the traditional approach of 50 or 100 years ago – company provides information, it is cross-checked against publicly available information, credit scores based on filed accounts perhaps 18 months out of date are referred to, and company obtains/is denied finance. This has been going on for thousands of years. All this will change in the next few years.
For the first time there will be an incentive for smaller companies to opt to share their full financial history, based on their internal management information, instantly with a potential provider of finance, as the information is extracted from their management accounts. The incentive will be clear and simple – faster and cheaper access to finance.
Like many things in this world, this is not based on an incredibly new and innovative technology that has suddenly been developed – it is an area that larger companies have embraced for more than a decade but the smaller business, much like all of us were 20 years ago, would rather keep its private information private and share only information requested by a finance company. The eternal game of cat and mouse between finance seeker and finance provider is inefficient and pointless in an age when total transparency with your financier could collapse your cost of finance dramatically.
The key to this golden age of cheaper finance is the extraction software, and this is an area that I believe will be of increasing focus in the coming months and years. Companies that operate such extraction software are working with large corporates but are already working on bringing it into the SME market. Of course it will take time for it to really take root in the SME sector, but once the cost benefits are clear I expect penetration to take a strong hold.
