The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

However, despite their significance, SMEs often find themselves facing hurdles in accessing the financial support they need to thrive. In this blog post, taken from a recent conversation between Mike Conroy of UK Finance, and Experian’s John Griffiths, we will explore the challenges surrounding financial inclusion for SMEs and delve into how leveraging financial data can be the key to overcoming these obstacles.

The landscape of SME commercial borrowing

Commercial finance serves as the lifeblood for many SMEs, propelling them from modest family enterprises to substantial contributors to the economy. Yet, as we navigate an uncertain economic climate, accessing financial support can feel elusive for numerous SMEs. While the availability of loans isn't the primary issue, challenges such as high interest rates, unpredictable consumer demand, and cashflow constraints are constricting the customer bases of lenders.

Businesses can face difficulty in demonstrating affordability and viability amid higher interest rates and economic uncertainties, which have caused a shift to alternative finance products.

Understanding borrowing habits: knowledge gap and aversion to debt

Surprisingly, around 31 per cent of UK SMEs are labelled as "permanent non-borrowers" – businesses that have never applied for any form of commercial credit. This reluctance to borrow is often rooted in a knowledge gap among business owners regarding financial products. Some small business owners are averse to any debt, even when presented with low-interest rates.

While an estimated almost 4 million UK SMEs are using some form of external financing, there is still a considerable portion that remains outside of the credit system who could benefit from it. Bridging this gap requires not only making financial products accessible but also demonstrating their value to businesses that may be hesitant to borrow.

The Role of Financial Data: Empowering SMEs and Lenders

Overcoming the challenges of financial inclusion for SMEs requires a paradigm shift. Recognising the diverse needs of SMEs through using reliable and up to date datasets to understand each business’s unique circumstances.

Financial data becomes the linchpin in this approach. By using data, lenders can gain insight into businesses' priorities, commercial affordability, and concerns. This allows for a personalised lending experience, making SMEs feel more comfortable accessing essential credit lines.

Steps towards financial inclusion: a data-driven approach

To empower SMEs in their journey towards financial inclusion, several steps can be taken:

1. Financial Education: Closing the knowledge gap is crucial. SMEs must understand the diverse financial products available to them and the potential benefits of responsible borrowing.
2. Data-Driven Decision-Making: Lenders should embrace a data-driven approach to understand the unique needs of each business. This involves using a comprehensive range of data from credit reference agencies, including risk scores, commercial CATO data, and other credit data sharing schemes.
3. Enabling Responsible Borrowing: SMEs can improve their creditworthiness by adopting responsible financial practices. This includes timely payment to suppliers, effective cash flow management, and avoiding unnecessary hard credit searches.

The path to financial inclusion for SMEs is not without its challenges, but the solution lies in harnessing the power of financial data. By bridging the knowledge gap, adopting a data-driven approach, and encouraging responsible borrowing, we can create an environment where SMEs not only survive, but thrive in the ever-evolving business landscape.

To hear more about building financial inclusion for SMEs, you can read the full summary of Mike Conroy and John Griffith’s conversation here.