Empowering SMEs: A guide to digital transformation and financial success

From local perfume boutiques to women-led handicraft businesses, small and medium enterprises constitute a critical aspect of the global business community. According to the World Trade Organization, SMEs constitute over 90% of the business population, 60-70% of employment and 55% of GDP in developed economies. 

Moreover, with the global workforce projected to swell to 600 million by 2030, fostering SME growth becomes a key driver of economic stability and a compelling focus for governments worldwide. While large enterprises focus on the existing offerings, small enterprises are always keen to innovate and bring new products and services to the market.

But the big question is –

Do SMEs get as much support as they contribute?

A report by the World Trade Organization, ‘Trade finance and SMEs—Bridging the gaps in provision,’ highlights that globally, over half of the trade finance requests by SMEs are rejected, compared to just 7% of multinational companies.

These statistics depict the constant struggle that SMEs face when it comes to running their businesses. The struggle for access to finance is just one of the hurdles for SMEs. Several factors impede their growth, ranging from geopolitics and macroeconomics to a lack of technology adoption, workforce shortages, and more.

Here are some more common challenges:

1. Limited access to finance and financial transparency

SMEs enjoy less access to external finance and face higher transaction costs and risk premiums. 

About 43 % of formal SMEs in developing countries have an unmet financing need of nearly $4.1 trillion.

                (Source: Global SME Finance Facility Progress Report by IFC)

• Most SMEs rely on bootstrapping funds from family or friends to launch and run their businesses, as banks find it risky to lend to small enterprises.
• Financial institutions hesitate because small enterprises do not have quality financial statements, which makes it difficult to assess credit risk and reinforce payments.
• Many small businesses are informal, and the regulations become an obstacle for financial institutions that cannot lend to enterprises without proper documentation or elements necessary for due diligence.
• Gender bias is another issue. It is even more difficult for women-run SMEs to obtain loans. According to a report by IFC, “It is estimated that 68% of women-owned SMEs with credit needs are unserved or underserved.” Despite so many offerings, banks still fail to invest in targeted marketing and product uptake for women.

2. Digital disconnect

Large-scale businesses often stand unfazed despite disruptions like pandemics and geopolitical tensions because of their agility in adapting to market conditions and embracing new technologies and digitalization. Many small companies are either not adopting technology or lack awareness of how to kickstart their digitalization journey. Other concerns pertain to costs, privacy, security, and lack of skilled workforce who are hands-on with technology solutions.

According to the World Economic Forum survey report on the Future Readiness of SMEs , companies recognize that keeping up with technological and innovation demands is important, with 25% citing it as a top challenge and close to 74% expressing a struggle to maximize the value of their company’s data investments.

3. Struggling with finance management

An old saying in treasury management – “Cash is the king”, stands true even in today’s era and reflects how important it is for any business to know their cash positions. With manual financial management, many small businesses overlook the overhead costs and expenses that create an imbalance in the cash flow. Manual invoicing is tedious, not to mention the overhead, often leaving room for errors. Some rely on software, but that’s either legacy systems which don’t align with their needs or is often a tedious juggle between different tools to manage vendor payments, track customer orders and internal expenses. These operational overheads result in inaccurate financial data and record keeping, leading to chaos in adherence to regulations and compliance.

4. Talent acquisition and retention

Acquiring good talent is a priority for every organization, especially SMEs, because the employees play an important role in the growth of the business. SMEs often face budget constraints which will not attract the majority of the talented workforce. It also impacts the investment in skill development.

5. Hesitations in going green

With end consumers expressing a strong desire for sustainability, every business strives to incorporate environmentally responsible practices. SMEs have many barriers when it comes to laying down a sustainability plan. They cannot prioritize sustainability with other operations or see reluctance from employees who rarely acknowledge environment-related initiatives.

Fewer than half of companies with a turnover under $25 million report on their sustainability performance. Among big groups with revenues above $1 billion, 94% do.

                  Source: UN Global Compact surveys

With governments continuously working towards establishing standards and bringing regulations in place, ESG is no longer a buzzword. SMEs that fail to adhere to ESG standards will not only lose business and opportunities but can face backlash from end customers, impacting their brand and customer loyalty.

What can SMEs do to flourish in this competitive era?

While mutual support from regulatory authorities, financial institutions, and governments can solve only part of the problems SMEs face, there is great scope for changes they can bring about. These changes will help strengthen their businesses, empower them to invest in innovation, and gain a competitive edge in this constantly evolving market landscape.

1. Digitalization is the key, it's now or never

• Work with companies that offer service-based models to gain access to tools and technology without having to buy or develop the tools themselves
• Collaborate with other small business owners to understand their digital transformation journey and best practices for data security.
• Invest in networking and cross-industry collaboration and explore growth avenues.

• The Centre for the Fourth Industrial Revolution, Brazil and platforms like MantaMESH are working with SMEs to leverage technology to change their existing ways of working.
• FIRST, the Forum for Internet Retailers, Sellers, and Traders in India, has been launched in India to create awareness among SMEs and help them go digital.
• With offices in Spain, Portugal, and the UK, Santander Bank offers a wide range of digitized solutions for SMEs, including a marketplace, the global payments platform PagoNxt, and a complete ecosystem of financial products.

2. Transforming financial management

Cash flow management is not limited to tracking expenses. It’s looking at the larger picture, i.e. Financial Planning. SMEs should switch to adopting technology for cash management instead of indulging in manual processes. The Cash Flow Management tools provided by fintech service-based companies can help SMEs gain enriching insights into their business. These solutions encompass features like automated bank reconciliation, real-time aggregated view of cash positions, and tracking of all sorts of vendor payments, to quote a few.

Looking at the need of the hour, banks also foray into providing full-fledged capabilities to clients with financial management features. For instance,

• Singapore-based OCBC Bank has integrated business financial management capabilities into its digital business banking platform. It allows SMEs access to a 360-degree view of their sales, expenses and cash flow trends, enabling them to identify patterns and obtain insights key to better business planning.
• Banreservas, one of the largest banks in Dominican Republic, has created a program called Fomenta Pymes (“Promote SMEs”) to integrate products. These include electronic payroll services, and insurance policies to protect against fire, accidents, machinery breakdowns, civil liabilities and other catastrophes.

A study by PwC showed that small businesses that regularly monitor their cash have an 80% survival rate.

3. Investing in the right skills and people

With the advancements in technology and ever-changing consumer needs, the workforce of an organization must stay relevant and updated. SMEs especially need to focus on ensuring employees are continuously learning and upskilling because the growth of any business depends on its smooth operations. Many government initiatives are being launched to support SMEs, enable their staff to hone skillsets and add more value to the organization.

• In 2023, the European Commission issued a call for proposals under its Digital Europe programme for projects that focus particularly on the needs of SMEs and aim to expand the existing offer of training and retraining for both job seekers and current staff.

4. Turning sustainability into innovation opportunities

SME’s need to understand that sustainability is just a milestone, it’s an ever-evolving journey. Sustainability must be embedded into the overall mission of the business. The benefits of ESG practices might not come fast, but they will eventually help SMEs position themselves better in the market. Since governments and lending companies consider ESG to be one of the criteria for assessing the sustainability of investments, it is great news for SMEs.

• Singapore-based OCBC Bank has launched the SME Sustainable Finance Framework to simplify access to less costly green loans and help SMEs shift toward sustainability. 

With ESG adoption becoming the driving force, many businesses get access to green financing. Governments and regulatory authorities should also introduce financial incentives for ESG performance so that SMEs consider sustainability an accelerator and not an unnecessary expense.

Enable your financial institution to promote the growth of SMEs

Nagarro isn't just a technology partner; we're architects of digital transformation. We empower banks and financial institutions to develop solutions that promote the success of small and medium-sized enterprises (SMEs).

Here's how we turn vision into reality:

• Human-centred design: we value empathy and develop seamless user experiences for SMEs through deep understanding and continuous feedback.
• Proven expertise: We have developed and implemented successful solutions for SME marketplaces, merchant onboarding, payment services and more worldwide.
• Strategic partnership: Our combined technology and consulting expertise unlock new business models for SMEs that tackle complex challenges head-on.

We engage with our customers as partners rather than merely service providers. If you are interested in learning more about how we can support any of your strategic focus areas, contact us.