Most SMEs have significant cash tied up in assets such as inventory, machinery, equipment, real estate or financial investments. The ease and flexibility of using these assets for lending could unlock huge amounts of liquidity and alternative sources of finance for businesses. In this blog we discuss some new techniques to make the qualification of the underlying assets smoother and more automated.
In the B2C market, consumer loans can be created completely online with just a few clicks. This is the case, for example, with credit cards, overdrafts, installment loans and, more recently, Buy Now Pay Later (BNPL). In addition, many banks are further digitizing their mortgage issuing processes so that customers can simulate and initiate a home loan without going to the bank branch.
By doing B2B market However, we are still seeing a lot of manual effort. For large companies, this can be justified to some extent in view of the typically high loan amounts and the high degree of customization. For SMEs, however, this is less acceptable from both a customer and a banking perspective.
The customer representative is often the CEO (or CFO) who performs these operations himself, which means that he wants to do this as quickly and as efficiently as possible. Additionally, SMBs often do not have the tools to optimize cash management, which means that quick lending can be the life and death of the business. For banks, the (lower) loan amounts for SMEs often do not justify a high level of human interaction, as this would reduce profit margins.
This results in a need for further digitization (in the form of online self-service). Many SMB loan products are already well automated, like an overdraft or tax loan, and several fintech offerings have emerged recently that automate invoice factoring (i.e. using accounts receivable or invoices as the underlying asset product for one Credit). However Asset Based Loans still remain quite manual as the underlying asset (collateral) is identified, described, analyzed (e.g. the quality, ownership of the asset, the liquidity of the asset, etc.) automate.
Even so, new techniques can do this Qualification of the underlying assets much smoother and more automated. Some examples are:
- If the asset is a custody account or an insurance contract managed by the bank, then Lombard loan can be ideal. Since these assets are very standardized and under the complete control of the bank, it is possible to issue these loans with just a few clicks. see that Lombard² offer from Capilever.
- IoT devices (like sensors) can help with ongoing monitoring of the underlying assets (i.e., monitoring that the assets are still present and have not deteriorated in quality). This allows for continuous tracking of the underlying assets and can automate certain labor-intensive manual tasks that are performed today.
- A automated asset appreciation can be done using estimation models, e.g. by adjusting the value using asset-linked indices (see NLPT offer from Capilever) or using special service providers (e.g. Rockestate).
- A periodic review of quality and ownership can be supported by an automated notification if a check is required, supported by the uploading of certain supporting documents or a simple picture of the asset (see NLPT).
- Open accounting can help banks establish an instant, real-time connection with the company’s latest accounting situation, which enables real-time information on specific assets to be obtained. Tools like Silverfin, Xero, Sage, Intuit QuickBooks, etc. can help with this. Such a connection allows an SME to assess its creditworthiness by evaluating its business performance in real time instead of using outdated business reports. More and more banks are also offering SMEs value-added services for financial management (e.g. for predicting future liquidity). Offering these tools also enables banks to gain better insight into the trustworthiness, liquidity and solvency of an SME client.
- A number of Blockchain-related initiatives be developed that publicly store ownership of certain assets (such as property, art, etc.).
- Contract management toolswhich make it possible to automatically generate tailor-made collateral contracts based on an extensive set of rules that determine how the contract is to be structured by linking a series of standard paragraphs and clauses.
For banks, the valuation of collateral should a continuous and holistic effort, ie
- A security should ideally a mix of different asset types. For example, a property retains a relatively stable value and is less risky but not very liquid, while certain holdings could be liquidated much more quickly, but can also quickly lose value (e.g. if the product expiry date has passed). It can therefore be interesting for banks to use a collateral pool with different properties in terms of value stability and liquidity. The better the quality of the asset pool, the lower the lender’s risk and the lower the interest rate.
- A continuous monitoring of the base value is required, i.e. not just at the point in time at which it arises. This means periodically reviewing the quality and ownership of the asset, reassessing the liquidity of the asset, and reassessing the asset. In this way, the lender ensures that in the event of loan repayment problems or even payment defaults, an adequate collateral value is maintained. This also means that margin calls should be provided if the collateral value no longer covers the outstanding loan amount.
Despite his enormous potential As shown above, asset-based lending is still undervalued. Most SMEs have significant cash tied up in assets such as inventory, machinery / equipment, real estate or financial investments. Use these assets easily and flexibly for lending purposes could free up huge amounts of liquidity.
For both banks and SMEs, this can be reliable access to capital with limited risk. It also makes SMEs less dependent on credit scores, which is one more
predictive credit risk assessment. This means that you can also qualify as a start-up or new company, provided you provide the necessary assets as collateral.