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Thought leader insights

The Banking Circle recipe for better business loans

Wednesday 10 April 2019 | 09:30 AM CET

Mishal Ruparel, GM, Europe, Banking Circle, looks at how lending is changing to better serve today’s SMEs

My favourite place to grab a bite to eat is a little independent restaurant in Stoke Newington. They do the best middle eastern food in London, and I’m certainly not the only one to think so – the buzz every lunchtime and evening is testament to that. Their success, however, is no guarantee of continued growth.

When I spoke to the owner recently, while waiting for my favourite lunch, I learnt that they are hoping to expand the business, purchasing a mobile food truck. But they are coming up against multiple hurdles which are causing them to think twice. The problem is, no matter how delicious the Za’atar Fried Chicken, a food truck is not cheap to buy, staff and run; moreover, it is seen as too risky for a traditional business loan from a bank.

It’s not just launching a mobile food service that is less desirable for a business loan. Restaurants can find business borrowing for other purposes difficult too. A commercial refrigeration unit could cost GBP 10,000, and if the fridge at a seaside café breaks one cold and rainy February, it could be tough for the business to pay to replace it immediately. Looking at the restaurant’s last three months of cash flow, a bank is likely to decline a loan application.

And what about gyms? We all know they are full to bursting every January, and sometimes even into early February, with New Year’s Resolutions fresh in our minds. Then they start filling up again as the summer approaches and swimsuits taunt us from the back of the wardrobe. Nevertheless, the in-between periods can be more difficult.

Seasonal businesses often find it difficult to get access to additional funds to help them fast-track expansion plans, whether for new branches, larger premises or adding staff and services. Even when such a business does get its hands on the much-needed loan, repayments are fixed and don’t reflect the natural ebb and flow of healthy business cycles.

The life of an SME in the UK

SMEs make up 99.9% of private businesses and employ 60% of the UK workforce – that’s an astounding 16.1 million people. By 2025, SMEs will contribute GBP 241 billion to the UK economy. But recent Banking Circle research provided a depressing insight into how SMEs are currently being served by banks. Over half of UK SMEs have been unable to access the cash they need in order to grow.

Some of the difficulties SMEs faced - in getting hold of the cash they needed - include poor rates, high fees, slow facilitation and length of loan available. A quarter (24.6%) of the SMEs said that without additional funding they would have to let employees go. 13.3% expected that the business would not survive without access to extra finance. This is a real danger to the economy when SMEs employ such a huge number of people.

But it`s not game over for the SME. The good news is that payment providers working with financial utilities such as Banking Circle can change this reality.

Writing the recipe for success

Financial utilities are capable of handling non-core banking functions such as payments, FX and loans, on behalf of other financial institutions. This removes the financial burden and risk from the bank, PSP, acquirer or other financial tech business, allowing them to focus on the all-important customer relationship whilst still delivering the best solutions and remaining competitive in a changing market. Financial utilities do not compete with the bank or FinTech but support it in delivering the best service possible.

The latest technology is also allowing new lending solutions, including Banking Circle Lending, to tackle the growing issue of financial exclusion for businesses. Too many companies are unable to reach their potential due to slow cash flow, late payments and business cycles that put off traditional banks from extending necessary loans.

PSPs working with alternative lending providers such as Banking Circle can add value to their proposition by offering fast, low-cost and flexible loans to their merchant customers. Once approved, a loan is deposited into the merchant’s account within minutes and is delivered in the name and branding of the PSP, but with Banking Circle taking all the risk. In the case of Banking Circle Lending, the time from application to the loan being paid into the merchant’s account is a maximum of 72 hours, compared with up to 60 days for a traditional business bank loan.

Virtual accounts can be issued in the name of the merchant, and the acquirer redirects its card funds due to that merchant directly into this account. The agreed loan repayment is then deducted, and the remainder is instantly settled into the merchant’s account. Repayments can be a fixed amount or flexible percentage, ensuring repayments mirror the ebb and flow of even the most seasonal business.

This new way of lending is transformational for small businesses across Europe: businesses which otherwise could not access loans and could not expand or may even be forced to close their doors.

Receivables financing solutions like Banking Circle Instant Settlement are another lifeline to smaller businesses. This instant loan is based on payments due into the merchant account from card takings, without having to wait for payment cycles. Imagine what this can mean for a restaurant which usually has to wait up to five days to receive its settlement funds from the acquirer. Or for a seller waiting to receive funds from an online marketplace with a payment cycle of 90 days.

This can not only help small businesses to survive in tough conditions, but it can also drive a new income stream for acquirers and PSPs swimming in a highly commoditised ocean, helping them to grow and stand out in a crowded market.

Working with financial utilities, financial institutions can offer business customers access to better borrowing solutions, without having to devote in-house resources or invest in new systems development. Working with third parties in this way, within the ecosystem model championed by Banking Circle, allows financial institutions to deliver transparent, easy-to-manage, flexible and low-cost lending solutions. And crucially, without risk to their own business.

About Mishal Ruparel

Mishal Ruparel is Senior Director and General Manager for Europe at Banking Circle, responsible for overseeing Sales, Product and Client Services. Mishal also administers the daily operations for the Europe business headquartered in London. Mishal has more than 15 years’ experience within Banking and Financial Tech, having held senior positions in organisations such as Barclays, WorldPay and First Data in roles that include Corporate Finance, International Development and Sales. He joined Banking Circle in 2015 as Head of Banking and Global Alliances.

About Banking Circle

Next-generation provider of mission-critical banking infrastructure, Banking Circle is underpinning the service proposition of Financial Tech businesses, PSPs, FX providers and banks. By leading the rise of a super-correspondent banking network, Banking Circle is helping financial institutions to provide their customers with faster and cheaper cross border banking solutions, without the need to build their own infrastructure and correspondent banking partner network.

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