Technology could help drive SME lending sector in UK

If British small and medium-sized enterprise (SME) owners are counting on bank lending to pick up anytime soon, they probably shouldn't hold their breath.

Even the Bank of England - which has pumped millions into the economy to try to spur short term lending growth from financial institutions - seems resigned to the notion that these firms aren't going to be as willing when it comes to lending going forward.

"There are many businesses that the banks have no interest in lending to, either because of the sector they are in, or because they are very young," Marc Glazer, head of Boost, recently told This Is Money. "Equally, many firms that deal direct with consumers can't typically use invoice financing, while asset finance will not cover building extensions."

As bank loan approval rates continue to stagnate, many SME leaders are looking toward alternative sources of finance. That's because many alternative lenders are using more lenient scoring measures to determine whether or not a company is eligible to receive a loan.

For instance, some lenders are employing Payment Reporting Builds Credit (PRBC) scoring methods, which weighs multiple financial factors like an SME's ability to pay past utility bills. This has opened up funding for a number of smaller companies in the United Kingdom.

Targeted solutions with technology
Even so, there is still a significant lending gap in the British SME sector. In a recent column for The Economist, Michael McMahon, a macroeconomist at the University of Warwick, advocated developing more targeted lending initiatives.

He emphasized that the key to success will be designing "a system that creates the right incentives." This strategy could be most effective if it incorporates technology like the Internet.

In the United States, alternative lenders and SMEs have experienced a quality relationship largely because they are connecting through the Internet and other streamlined mediums. Biz2Credit co-founder and CEO Rohit Arora detailed some of these processes in a recent blog post for Fox Small Business.

In particular, technology enables SME owners to request loans entirely online, as opposed to filling out forms manually. Then, those applications would reach the lending firm faster, thereby speeding up the times for approval and receiving the finances.

In addition, technology has allowed alternative short term lenders to store a larger amount of information about SMEs more accurately. That way, firms that use measures like the PRBC scoring method will have an easier time keeping track of multiple financial factors simultaneously.