SME loans: differing perceptions of banks and SMEs

Discouraged SMEs are companies that have a need for financing but do not apply for a loan for various reasons. Based on the study mentioned, this amounts to around 16,000 SMEs in Switzerland that represent untapped potential for banks. There are many reasons why SMEs are discouraged. These include concerns such as “the costs are too high”, “the process is too laborious”, “you need too many documents”, “the process takes too long” or “the application will be rejected anyway”.

What is generally interesting here are the differing views and perceptions of banks and SMEs. If you look at how long it takes, for example, the process at the bank only begins when they receive the application for the loan. But for business owners, the process begins much earlier, with the decision to ask the bank for a loan. It usually then takes some time before they actually approach the customer advisor. The request is then discussed, initial checks are carried out, and any necessary documents are requested or followed up on before the loan application is actually submitted. This example shows how for this reason alone, the perceived duration of the process is significantly longer for an SME than for a bank. The situation is similar with the other concerns.

Most loans are rejected at an early stage of the application process. The three reasons most frequently cited by banks include: Firstly, the SME requests a form of financing that the bank does not offer. This mainly applies to start-up financing in the foundation phase, so SMEs that are essentially looking for equity. It also includes conditions imposed by the bank, such as a smaller cantonal bank stipulating that it will not finance the foreign business of an SME that is not based in the canton. Secondly, unrealistic expectations, for example regarding the possible loan amount in the given company situation. Thirdly, the required documents are not available or the SME does not want to submit them because it is only an inquiry and there is no firm intention to actually take out a loan.

From the bank’s perspective, the typical loan process begins either with the receipt of a request via an online form or in a personal meeting with the customer. If the necessary documents are complete and the request is sufficiently clear, the loan application can be reviewed. At some banks, the review and decision-making process is highly decentralized and takes place at branch level. Many banks do not keep records of how long the process actually takes. And if they do, then this is only information about the time taken to assess the loan application actually submitted. Because of the decentralized approach, there is usually no information about the time before that, in other words the time that has passed since the initial consultation. Once a complete loan application has been received, a decision can usually be made within a few days. However, this period may be extended indefinitely if missing or incorrect documents result in a backand- forth between the bank and the SME, and the SME possibly even has to appoint a trustee to prepare the documents. An alternative, much faster process that only a few banks implement is the instant credit process for existing customers. Here, the bank continuously analyzes the SME’s payment history and can therefore offer a loan in the form of a credit limit at any time, ideally without the need for further documentation or checks.

According to the information provided, the SME lending business is very important to the banks. The primary focus is often not on the profitability of the individual loans, but on being able to provide comprehensive services to customers. This is particularly important given that business owners are often both private and corporate customers at the same bank. However, it should also be mentioned that banks have little interest in lending to certain sectors and companies, largely due to risk considerations.

SMEs often turn to their private circle, i.e. their circle of friends and acquaintances. According to the 2021 study mentioned above, 23 percent of SMEs use personal loans of this kind. We looked at alternative providers as part of the current study. These providers bring together SMEs in need of credit and private or institutional investors. On the one hand, there are market-place or platform providers for crowdlending, such as Swisspeers. Other providers — like Kamuno, for example — do not have a banking license but do their own lending.

For me, two findings were particularly interesting. Firstly, that the concerns of SMEs such as “the rejection rate for an SME loan is very high” need to be viewed with a degree of differentiation. In the early stages, when the initial inquiry is made, the rejection rate is indeed quite high. However, when it comes to the actual, prepared loan application with a realistic estimate of the loan amount, etc., the rejection rate tends to be low. This brings me to a second insight from the study: “Where there’s a will, there’s a way.” According to several banks, if a bank wants to grant a loan, there is always a solution. I think this also gives new hope to some discouraged SMEs.