Trustworthy Risk Assessment and Sustainable Financing is Key to SMB Recovery

Integrated, tech-based risk assessment capabilities provide an ethical and sustainable infrastructure to ensure financial responsibility, and allow small-to-medium businesses to access vital recovery financing despite a challenging and turbulent economic landscape. 

The world and its economies are in the midst of the fastest transformation ever experienced in modern times, with the COVID-19 pandemic resulting in millions of people laid off, furloughed, or made to work from home. Many have signed up for unemployment, and in the majority of countries, governments are working around the clock to provide financial and medical support. Small and medium businesses have also been heavily affected, with many floundering to ensure their business can survive to see the end of the pandemic. 

The numbers back up this struggle too, with a report from McKinsey & Co finding that 80 percent of UK-based small-to-medium enterprises say their revenues are on the decline due to the pandemic, and one in four are concerned about defaulting on loans. The report also found that under current conditions, more than half of the UK’s 5.9 million SMEs are likely to be out of business within a year, especially if revenues take a 10-to-30 percent hit.

It’s these factors that have driven more UK-based businesses than ever before to seek out alternative funding options, like fintech P2P lenders and invoice financing marketplaces in an effort to keep their livelihoods afloat. Investors with capital to spare are also flocking to these platforms in the hope that, despite a turbulent economy, they can continue investing and growing their wealth. 

An initiaitve we recently launced at my own fintech company Crowdz, entitled Reclaim the Future for example, focuses on enabling corporate enterprises to create real social impact with their bottom line, by funding mom-and-pop businesses that have struggled to access finance options during this difficult time. It's part of the reason we saw a 5000 percent increase in business users globally since the pandemic began.

In a perfect world this would be the end of the story; business signs up to a funding platform, business is connected with an investor, funding is secured, business stays operational, investor grows wealth. However, if 2020 has proven anything, it’s that we don’t live in a perfect world. Economical pressures and times of crisis leave struggling business vulnerable to financing scams, predatory lenders and other forms of exploitation. As such, both businesses and investors need to be conscious that the platforms they’re choosing to support their business are both sustainable and ethical; so how exactly can both businesses and investors feel sure that they’re putting their confidence in the right platform?

In short, it’s through sourcing platforms who have put their product to the test, both internally and externally. For the UK market in particular, this means participating in things like regulatory sandbox tests, like those conducted by the Financial Conduct Authority (FCA). These tests provide fintech firms a safe space to test products, services, or business models within a safe environment to better judge the viability of innovative products or services, which means that the end product is optimized to provide maximum benefit to end-users, fintech innovators, investors, and market regulators. 

Transparent internal testing measures are an especially important consideration when selecting a platform. Opt for platforms who partner with outside organizations to accurately assess and predict risks around default, payment, and supply probability. A credible outside testing organization should aim to deliver the most accurate risk assessments, like Wiserfunding, a venture from NYU Stern professor, Edward Altman, which builds upon his famous Z-Score model with cutting edge technologies to source and process structured and unstructured data to deliver up to 95 percent default prediction accuracy for investors, which is 30-20 percent higher than manual, self-administered risk assessments.

For responsible fintech lending platforms, a combination of risk assessment measures should be used to generate the most equitable approach to lending. A great example of this can be found in Crowdz’ proprietary SuRF Score, which utilizes inputs fom external organizations like credit scores from Wiserfunding, AML compliance from NorthRow and invoice fraud checks from Trade Finance Market (TFM), as well as assment of probability of default, payment, and soon, probability of supply, as well as ESG risk.

While the world, it’s people, and it’s economies are experiencing a turbulent time, the risks associated with sourcing financing, or finding a platform to invest in don’t have to be equally as turbulent. By sourcing an ethical, sustainable, and transparent platform which undertakes the necessary testing for viability and risk assessment, both businesses and investors can survive - and even thrive - despite the pressures of the pandemic.