How open banking can support business borrowing
Challenge >>
In December 2022, the Federation of Small Businesses (FSB) published its Credit Where Credit Is Due report, highlighting the difficulty faced by the UK’s small businesses in securing cost-effective finance. It revealed that post-pandemic business debt has increased from £167bn in January 2020 to £203bn in September 2022.
Faced with the often time-consuming and bureaucratic process of applying to traditional lenders for funds, many business owners turn to costly credit cards and overdrafts or use personal borrowing to subsidise their business.
In addition, delays in receiving funds often mean that money arrives too late to address short-term or seasonal funding gaps for many businesses, disrupting cash flow and exposing them to further charges.
Solution >>
While one size does not fit all for SME borrowing, it’s clear that many businesses are unaware of the opportunities offered by alternative forms of credit, enabled by open banking.
By consenting to share their business transaction data, potential lenders can access up-to-date data for credit analysis – rather than historic data – which offers powerful advantages.
Benefits of open banking-enabled business borrowing
- Speedy applications and decisions – by giving access to transaction data, firms can check their eligibility, and apply for loans in as little as five minutes. They can also have a decision in days or even minutes.
- Once loans are approved, this can also mean faster funding – some lending platforms are able to deliver funds to businesses within 24 hours.
- Seamless integration with cloud accountancy software – borrowing is offered as an option via several major accountancy software packages, meaning business owners can check their cash flow, highlight a financial need and apply for funds there and then. Firms can also issue invoices via their accounts package, speeding up payments.
- Less reliance on paperwork – the time-consuming process of gathering months’ worth of accounts and bank statements is one of the biggest barriers to borrowing, particularly for smaller firms which don’t have a dedicated finance department. Eliminating the need to do this may encourage businesses to apply for the funding they need.
- Tailored repayment terms – rather than the ‘one size fits all’ finance from some traditional lenders and invoice finance firms, many open banking-enabled lenders offer bespoke offers of finance, including borrowing for as little as one day.
- Increased likelihood of loan approval – better informed lenders are able to make more accurate decisions on risk and affordability, which means they are more likely to approve a loan. Firms also feel more confident that their loan will be approved, overcoming another barrier to funding.
- Better credit rates – effectively assessing a business’s ability to repay a loan also means that lenders can offer more competitive rates. One lender even offers a discount on the loan rate to firms which share their data. Open banking data can also be shared with brokers allowing them to shop around for a loan on behalf of a business.
- Supports ongoing financial needs – instead of re-sending bank statements every time a facility needs to be renewed, the open banking connection remains active (and can be quickly reauthenticated if it expires) eliminating the need for businesses to reapply for top-up loans. The data automatically flags the need.
- Business certainty – faster lending decisions and approvals mean that businesses are confident about when they can access their funding, enabling them to plan their finances more effectively and smooth out temporary cash flow issues.
Lending options for firms
There are many different ways for businesses to harness their open banking data – embedded finance through their accounting software, alternative lending platforms and marketplaces (some of which are supported by the government-backed British Business Bank), brokers and dedicated business loan providers.
The technology is built on the secure systems already used by high street banks and challenger fintechs, while apps and services are regulated by the Financial Conduct Authority, or a European equivalent. This means companies have to follow strict rules and stringent standards to keep data secure.
Conclusion
Access to cost-effective credit powered by open banking could ease the process of borrowing for smaller firms and help plug an estimated funding gap of £22bn which is slowing growth in this important sector.
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