We’ve all heard the stats about Small & Medium Size Enterprises being the backbone of the global economy. 90% of businesses? You bet. 50–60% of global employment. Yawn. Yet they’re woefully underfunded. The SME funding gap is estimated at an astounding $5 trillion worldwide — and you’re probably tired of hearing about it. It’s beyond time to move beyond talk and towards addressing the gap with automated and scalable solutions.
Fortunately, we are on the cusp of real change, as technology-driven lenders are finally cracking the code on SME finance. So, what does it take to succeed in the SME lending space? Here are the seven habits of winning SME lenders — and why we, at Aperture, are doubling down on this opportunity.
- Be Embedded
You say you want to build a direct-to-SME lending brand? You really don’t. It’s hard and expensive, and you better have a war chest. Just look at OnDeck. Before being acquired by Enova they were spending nearly 30% of their revenue — or $1,500–2,000 per loan — on sales and marketing. And, if your customers can even find you, you might wish they hadn’t. Borrowers who actively seek out direct lenders tend to be higher-risk, a phenomenon called “adverse selection,” which leads to low conversion and approval rates.
Smart lenders embed. They integrate directly into SME workflows at the point of need, reaching highly qualified borrowers where they live. This approach results in:
- 2–3x higher conversion rates than direct lenders
- 40–50% approval rates (versus 15–20% for direct lenders)
- Customer acquisition costs as low as $200–400 per funded loan
Sure, embedding means revenue sharing and giving up some upside. But the direct approach is a high-stakes bet for bigger margins that might (or might not) materialize down the road.
Admittedly, success in embedded partner lending isn’t automatic either. It takes more than just adding your product to someone else’s app. You’ve got to understand the full customer journey and engage seamlessly, as if your feature were a native part of the experience. Get that part right, and you’ll have a good shot at building attachment and loyalty.
(Our thoughts on why embedding financial apps is advisable from the SaaS perspective here).
- Be Ready for Hyper-verticalization
Lenders need to be where the SMEs are — embedded into the numerous specialized software platforms that SMEs use each day to run their businesses. Vertical SaaS is growing like crazy — 20–30% CAGR — but it’s fragmenting even further into hyper-verticals. Toast for restaurants? Fine. But now we’ve got Slice for pizza shops, Dripos for coffee shops, Lunchbox for quick-service restaurants, and Brizo for ghost kitchens. And on it goes.
Integrating directly with every single one of these platforms will prove impractical. That’s why we at Aperture have recently invested in Groov, an early stage company which is building the API infrastructure to connect lenders to multiple platforms — offering “many-to-many” access through a single integration.
Chart by Point Nine; appearing in the article “The State of Vertical SaaS in Europe” by Alexandre Dewez. Thank you Alexandre for your kind permission.
- Have an AI-Driven Risk Model
Think you know how to price SME risk? Here’s the old-school way: Pull out old financials, check the debt service coverage ratios, maybe look at a credit score. Great for 1995.
Here’s how winning lenders do it now: They plug into live data from everywhere an SME operates — Vertical SaaS platforms, ERPs, bank accounts, payment flows. Every business interaction becomes a data point.
But it’s not just about collecting data — it’s about pricing risk dynamically. Today’s lenders are:
- Micro-segmenting SMEs down to specific niches — i.e., to each embedded platform
- Dynamically pricing risk to reflect real-time changes in financial health
- Building sustainable portfolios that can weather market cycles
Revenue-based underwriting is driving risk scoring now, with debt coverage taking a back seat to current cash flows and real-time financial health. It’s about what’s happening right now, not what happened in last year’s tax return.
Thanks to Alex Johnson for concept. This has been applied in a UK perspective.
Now add in machine learning (i.e., Random Forests, Deep Learning, Ensemble Methods, Explainable AI), and you’ve got risk models that get smarter with every transaction. Data ingestion, model building, deployment, and backtesting get merged into a continuous, real-time flow. The winning lender has an analytical advantage which compounds every day.
- Automate Everything (No, Really. Everything)
Why do banks fall short on SME lending? There are many reasons but mainly they’re stuck in manual processes with operational costs that can’t be recovered across small loans. As a result, many SMEs — often in need of quick cash flow solutions — have been left unserved by the banks.
By contrast, today’s SME borrowers expect a fast, seamless experience and are increasingly getting it. The winning lenders — typically non-banks — are the ones who can automate everything — and I do mean everything:
- Onboarding and KYC
- Document uploading and review
- Risk decisioning
- Reconciliation and collections
Sure, there are lending models, such as factoring and venture debt, which don’t lend themselves to full automation. But models like merchant cash advance (MCA), B2B BNPL, and invoice discounting? These are perfect for automation — and for delivering fast, flexible funding to SMEs. Eventually, we expect banks to up their game too– and are already seeing promising initiatives like HSBC’s Semfi JV with Tradeshift, alongside newer AltFi providers like Pipe and Triver.
- Be in the Flow of Funds
Smart lenders narrow their risk by staying in the flow of funds. Take MCA providers, for example (Think Stripe Capital or PayPal Working Capital) — they narrow their risk by micro-targeting the future cash flows generated by a single point-of-sale (POS) terminal or payment gateway. Recovery? It’s automatically recouped from a slice of daily sales captured through the same terminal. When business booms, the lender collects faster. When it slows, they collect slower — but the lender is always first in line.
Invoice discounting flips the script — performance risk shifts to the buyer, not the SME. With full automation, lenders can enable whole-book financing, where buyer payments are routed directly to a lender-controlled account — i.e., a neobank set-up with virtual IBANs — before the SME receives their portion. Financing solutions can extend to buyers through debit mandates that secure future payments while validating the underlying debt. If a payment happens to go rogue, open banking rails could potentially be used to trace and recover it, adding an extra layer of security.
- Be Balance Sheet-Light
Successful SME lenders need to quickly move loans off their balance sheets, whether through sales or securitization. As a lender, even a warehouse line where you can pull down 95% of loan value will still leave the other 5% eating through your equity very shortly. From origination onward, structure your loans to be attractive to debt markets. Having multiple ways to offload loans will be key to scaling.
- Rethink Everything
The SME financing gap isn’t going away overnight. But the lenders who win will be those who rethink everything: customer acquisition, risk management, and capital efficiency. If you’re a lender in the real-time flow of accounting, transaction, and banking data, and with models that analyze and adapt to that data on the fly, do you still want to rely on outdated products from 10 years ago? Probably not.
It’s a high bar, but the reward is huge — for lenders and, most importantly, for the SMEs that desperately need capital to grow. At Aperture, we’re pleased to be part of this transformation in SME finance. Stay tuned for more investment news as we double down on SME lending.
Chuck Stoops does venture capital and growth services at Aperture.co.
