How B2B Lending Can Facilitate Economic Recovery

SMEs play a significant role in ensuring economic growth. In fact, roughly 95% of all enterprises belong to this category.

Most small and medium sized businesses depend on banks for financing. But bank financing can be very reliable. Many enterprises learned this the hard way during the recent financial crisis.

Since many banks now lend less than they used to, SMEs are finding it difficult to get affordable debt finance. And when capital adequacy requirements increase, banks will be forced to lend even less. As a result, the need for more viable sources of funding is increasing.

On the other end of the spectrum, there are institutional investors who need long term investment opportunities. Since many of them have already burnt their fingers in capital markets, they are looking for more viable investment opportunities. Unfortunately, there aren't many investment options that generate yield and security.

It is an interesting situation. SMEs need investors and investors need opportunities for investing. There is one problem, though. Big investors do not find SMEs all that attractive and consequently, the gap between investees and investors is widening. What we need right now is a financial solution to close it.

Theoretically, there are two options to bridge this gap between small investees and larger investors.

The first method is to pool enterprises that require investment in bond structures. Since this method will be based on capital markets, it is risky in many aspects. There are several other challenges as well.  For example, the risk profiles of investees may be incompatible. The structuring cost will be high and there will be intermediary fees.  Another problem is the slow execution and the inability to change credit terms over times. What's more, this method involves the same financial institutions that were instrumental in bringing about the collapse of the economy.

The second option is to encourage large investors to make small direct investments in SMEs.

Mainstream institutional investors are yet to warm up to this concept because these direct investments are usually small. In addition, finding a suitable company or project for investing in can be difficult.

However, by deploying crowdfunding through digital investment platforms, these problems can be overcome to a certain extent.

Some large scale institutional investors have already understood the potential of this platform. An advantage of using the digital platform is that eliminates the need for intermediaries. Consequently, the yields are higher than traditional investments. Furthermore, it provides better protection against risks as small investments are spread over many companies.

Since capital market movements have only a negligible impact on the performance of these investments, they are less risky. As far as investees are concerned, it helps them attract long term investments from several sources. This also reduces the cost of capital. When investees get direct investment from investors, they do not have to depend on banks.

Digital investment platforms have the potential to revive the global economy. Any investment in SMEs should be encouraged because they help bring world economies back on their track. What's more, B2B lending is not facilitated by banks and as such, it is more resilient.