MAJORITY of the local micro, small and medium enterprises (MSMEs) fail to secure loans due to stringent lending measures—and they end up asking family and friends for additional financing instead to keep their businesses running, according to a study by a cloud banking platform Mambu.
The “Small Business, Big Growth” report said 77 percent of surveyed Filipino MSMEs “have been unable to secure sufficient, or any, funding on at least one or more occasion over the last five years.”
This is higher compared to the 67 percent average for the entire Southeast Asian region.
Some 56 percent of the local entrepreneurs resorted to asking their friends and family for loans as a result; about 45 percent, meanwhile, dipped in their own pockets to start their businesses.
Nearly half of the MSMEs that were unable to find enough capital had cash flow concerns, the study noted. About the same percentage were not able to launch new products or services and failed to upgrade or improve technology as well.
According to Mambu’s findings, 93 percent of the Filipino MSME respondents said they are open to changing financial institutions for a better lending experience.
The cloud banking platform said this scenario provides an opportunity for new entrants in the industry, which can challenge the existing banks and financial technology firms.
Almost two-thirds of local MSMEs said better borrowing benefits and incentives are primary considerations in switching banks, especially amid the rise of alternative lending facilities. Other reasons include better financing options and customer service support.
“If lenders want to play a part in the success of Filipino MSMEs they need to modernize the lending experience, and embrace new technologies to make lending processes simpler, more personalized, and accessible,” Mambu Commercial Director William Dale said. “Better digital lending services will enable faster loan decision processing and onboarding, meaning funds get into the hands of the business owners when they’re really needed, and these MSMEs can get back to doing business.”
With this, Mambu urged financial institutions to do more to improve the loan application processes for borrowers.
The study noted that the loan process duration is a key factor in choosing a lender. While over 90 percent of the Filipino MSMEs look at low interest rates, the majority also want a short application process and cashout options.
This finding is parallel with the claim of 91 percent of the local MSME respondents: loan decision processing must be done more quickly. Some 87 percent, meanwhile, seek more flexible borrowing terms.
According to Retail Economics Chief Executive Officer Richard Lim, “the pandemic has ushered in enormous changes in how we work, play and shop, accelerating the democratization of digital and with its repercussions still reverberating across society. But access to capital is an area where digitization has matured at a much slower pace.”
“All too often, businesses looking to scale quickly and seize opportunities are choked by exhausting application processes. Stifled by slow and inefficient practices, current lending practices are no longer fit-for-purpose in today’s fast-paced, digital world,” he added.
“These businesses [MSMEs] are essential to the Filipino economy, employing around 62 percent of the country’s work force—they reduce poverty and drive innovation, and yet access to adequate funding remains out of reach for many,” added Myles Bertrand, managing director for Asia Pacific at Mambu.
Across the globe, Mambu listed the common barriers to securing financing among MSMEs: insufficient starting capital, too much paperwork in the lending application and “not strong enough” cash flow.
The study surveyed over 1,000 MSME owners globally who set up their company and applied for a loan in the last five years.