" class="no-js "lang="en-US"> Codat: Small business owners resort to personal loans due to lack of access to funding
Tuesday, April 23, 2024

Codat: Small business owners resort to personal loans due to lack of access to funding

New research conducted by Codat, the universal API for small business data, shows almost half (47 percent) of small and medium-size enterprises (SMEs) in the market for credit find it difficult to access external capital. The research also found 55 percent of SME decision makers taking out a personal loan to help fund their business.

The research, which surveyed 872 financial decision makers at UK SMEs, marks the launch of Codat’s ‘Closing the small business funding gap’ whitepaper, which calls on progress to data sharing practices to improve SME access to credit.

These difficulties have led growing cynicism amongst businesses towards current financing options available with nearly three quarters (73 percent) having something bad to say about it, including that it is too expensive, hard to get and too complex. Despite companies facing challenging conditions with rising energy bills and the cost-of-living crisis, 72 percent of businesses surveyed said they were unlikely to apply for external finance next year, put off in part by a system which places a daunting cost and admin burden on them.

When asked for the reasons businesses would not apply for credit, over half a million SMEs said that banks were off putting. Half (49 percent) of SMEs would like to know their chances of being accepted for financing ahead of applying.

SMEs play a key role in the economy and supporting them will help meet the government’s growth target. Over one in four SMEs who are open to credit (27 percent) say that their business would grow faster if access to credit was easier. This rises to over half of businesses with 10+ employees, which contribute 31 percent of all turnover in the economy.

Codat argues that there is an opportunity in the coming months for the UK to build on the success of Open Banking by supporting growing businesses through improved data sharing. Using technology to provide an easier and quicker way to share consented, real-time data between SMEs and potential lenders is the first step in reducing the UK’s funding gap. Based on their estimations, this initiative could cut the gap by around £10 billion and grow GDP by 0.7%.

The Data Information and Protection Bill, which expands Smart Data provisions in the UK, underlines better data portability as a priority but stops short of legislating that providers must allow users to freely access and share their data. More can still be done through improvements to UK data sharing schemes.

An SME Funding Passport, a standardised digital file containing company financial data necessary for underwriting, is the first step on this path. The data within this digital file would be consented, standardised, and easily shareable with lenders in real-time. Sharing data instantly with multiple financial service providers would enable SMEs to connect to more diverse and competitive sources of finance, and increase the chances of securing the finance their business needs.

Alex Cardona, COO & Co-Founder at Codat said, “The small business credit landscape is not set up for businesses or lenders to succeed. Lenders don’t have the necessary insight to make accurate decisions and the application process is so awful for SMEs that they’d often rather take out a personal loan to fund their business – or even make do without the cash they need.

“The existence of this dynamic is completely unnecessary given that the technology to resolve it is readily available. An updated approach to Open Data can enable standardised data flows between SMEs and lenders, resulting in instant and consistent loan applications. Closing the multi-billion pound funding gap will boost SMEs and fuel dramatic growth in the wider economy, it’s now just a question of making it happen.

“Regulators must not miss out on the opportunity to keep the UK at the forefront of progressive technology regulation, and must not stall on the promising start made by Open Banking.”

Martin McCann, CEO & Co-founder at Trade Ledger said, “SME access to credit will be solved via an ecosystem of lenders and technology partners. By leveraging Open Banking APIs and data modelling to build a real-time view of the customer, lenders can get a richness and quality of data that removes traditional blockers to extending credit to small businesses.

“There’s also a moral obligation for both regulators and industry to do what they can to support SMEs and critical supply chains with improved access to liquidity in order to fuel economic recovery in the UK and globally.”

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