SMEs are the darlings of politicians – the sputtering growth engine of the UK economy – and the most politically correct category of borrower in banks’ lending books.
The term SME is also probably the most reductive acronym in banking: the definition of a small and medium-sized business varies immensely and their diverse banking needs are evolving rapidly in tandem with globalization – with SMEs now making use of products and services originally used by larger corporates.
These factors are often overlooked as analysts wax lyrical about the vexed art of SME financing.
In 2005, the European Commission classified SMEs as companies that employ fewer than 250 staff, have an annual turnover of no more than €50 million and/or have an annual balance sheet total of up to €43 million. However, the way in which banks categorize SMEs varies considerably.
Research published by Accenture last year found that four UK banks each had different bands separating business and corporate clients and that they defined business clients as companies with a maximum turnover of anything between £1 million and £15 million.
However they are defined, from a transaction banking point of view, smaller companies have different cash-management needs to their larger counterparts. For example, SMEs are more likely to have a single bank and their transaction volumes will be lower than those of a large corporation.
SMEs are not typically as cash rich as many larger corporations, and the Accenture report states that SME deposits have been growing at a much slower rate than retail and corporate deposits since 2000.
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| Etienne Bernard, head of transaction services EMEA at RBS |
Such companies might also approach cash management in a more integrated way. “In SMEs, cash management, working capital and trade are usually handled by the same person so they don’t have the big treasury departments that mid caps or larger corporates have,” says Etienne Bernard, head of transaction services EMEA at RBS. “As a result, their approach to cash management is very integrated and they are increasingly focused on improving their working capital management. This can translate into things like requesting smaller-sized letters of credit.”
As a result of these differences, SMEs tend to have different requirements – and the banking products and services available to them also tend to be different. For example, larger corporations will have a greater focus on multi-banking solutions than SMEs.
SMEs also use structures such as supply chain finance (SCF) in a different way. A large corporation might choose to instigate a SCF solution whereby its smaller suppliers can gain financing at a better rate, based on the corporation’s higher credit rating.
For SMEs, in contrast, the focus might be on participating in a SCF solution offered by their customers and using this to improve their balance sheets.
Going global
Despite these differences, in certain areas SMEs are beginning to adopt solutions that have traditionally been reserved for larger corporations. A leading driver is internationalization.
Kash Ahmad, managing director, head of UK cash origination at Barclays, says SMEs are getting involved in business overseas and dealing with imports and exports. “Just because a company is an SME doesn’t mean that it won’t be dealing with clients outside the UK,” he adds.
This internationalization is having a knock-on effect on SMEs’ cash-management requirements. “Historically, SMEs’ needs were more basic,” says Ray Fattell, HSBC’s payments and cash management global head of product.
“However, we’re seeing SMEs becoming more international, which in turn makes their cash-management needs more sophisticated. They have started to need different types of cash-management product and different tools to make the most efficient use of their cash.”
For example, SMEs are now looking for their banks to offer foreign exchange capabilities.
As a result of this growing internationalization, Ahmad says SMEs are making use of products and services originally used by larger corporates. “For example, historically larger corporates were the ones who were more interested in making international payments – but we are now tending to find that this conversation is increasingly happening just as much with SMEs.”
Future shock
Another area in which SMEs’ needs are changing is technology. Several factors are affecting the types of technology SMEs are looking for and the ways in which they use them. On the one hand, the needs of an SME are likely to be simpler than those of a large corporation.
“A large corporate and an SME will always have different needs where technology is concerned,” says Bernard at RBS. “SMEs just don’t require the same type of technology because of their size and because those solutions are more costly.”
On the other hand, a smaller corporation might be more open to using emerging technologies. Fattell argues that technology is a great enabler for SMEs, particularly because it has given them the ability to do more online sales.
“That’s not to say that larger organizations are not benefiting too – but for SMEs, technology can help them to grow their businesses, and sell their goods and services without the need for a large physical infrastructure,” he says.
Bernard adds: “A big difference between large corporates and SMEs is that large corporates are less interested in platforms per se and are not typically looking to connect to their banks via smartphones and tablet devices.
“SMEs are focused more on the flexibility of electronic platforms offered by their bank, as well as on the use of mobile devices.”
SMEs vary considerably in their size and business model, and while there is a growing trend for smaller companies to venture overseas, there are many others which continue to be domestically focused.
Nevertheless, this trend is having a clear impact on SMEs’ cash-management requirements, and on the products and solutions available to them.