Guides

Open banking for small businesses – a quick guide

18 September 2023

The UK’s 5.5 million small to medium-sized businesses are the backbone of the economy, accounting for around 99% of the business population. Together they employ around 16.4 million people and are responsible for turning over approximately £1.2 trillion each year.

Yet the past few years have put many SMEs under pressure. There are 82,000 fewer SMEs than in 2020, and those that remain face increasing running costs, difficulties accessing short and long-term finance, and administrative burdens.

Our guide explains how open banking solutions can help address these challenges, including speedy access to cost-effective lending, ways to manage payments, and real-time insights into cash flow that can support business decision-making.

It also highlights some of the ways in which open banking payments and data can help streamline business administration, including eliminating time-consuming processes such as bulk payments, and maximise the value of business savings.

Business borrowing

In December 2022, the Federation of Small Businesses (FSB) published its Credit Where Credit Is Due report, highlighting the difficulty faced by the UK’s small businesses in securing cost-effective finance.

Faced with the often time-consuming process of applying to traditional lenders for funds, many business owners turn to credit cards and overdrafts or use personal borrowing to subsidise their business.

In addition, delays in receiving funds often mean that money arrives too late to address short-term or seasonal funding gaps for many businesses, disrupting cash flow and exposing them to further charges.

While one size does not fit all for SME borrowing, it’s clear that many businesses are unaware of the opportunities offered by alternative forms of credit, enabled by open banking.

By consenting to share their business transaction data, potential lenders can access up-to-date data for credit analysis – rather than historic data – which offers powerful advantages.

Access to cost-effective credit powered by open banking could ease the process of borrowing for smaller firms and help plug an estimated funding gap of £22bn which is slowing growth in this important sector.

Payments in and out  

Offering open banking as part of their payments mix can help smaller businesses to attract and grow their share of customers. Including this can offer the following benefits:

Enhanced payment options – ‘Pay by bank’ options allow customers to initiate payments directly from their bank accounts. This can bypass traditional card payment methods, while offering QR codes as a way to pay is also popular

Streamlined checkout processes – small businesses can simplify their checkout processes by integrating open banking payment solutions into their websites or mobile applications.

Lower transaction fees – by leveraging bank-to-bank transfers, businesses can reduce transaction fees associated with card schemes. For small businesses with lower transaction volumes or those operating on smaller profit margins this can be particularly beneficial.

Improved forecasting and cash flow with open banking

Many small businesses find it hard to get an accurate picture of their current financial position. As a result, it can be difficult to control fluctuations in cash flow, prepare for any unexpected shortfalls and collaborate effectively with accountants and finance professionals. This can hinder future earnings forecasts, slow decision-making on investments, and limit research and development, hindering growth.

Our July 2022 Open Banking Impact Report demonstrated that small businesses are increasingly utilising open banking-driven cloud accounting services to manage their operations, improve efficiencies, access better insights, and drive cost savings.

Including an embedded payments link with invoices can also speed up settlement times, helping to tackle the problem of late payments and improve cash flow.

Conclusion

There are around 750,000 small to medium-sized enterprises (SMEs) using open banking products, many as part of their cloud accountancy packages. We hope this guide will help some of the remaining businesses and sole traders take advantage of open banking and benefit from the cost and time savings it can deliver.

Read the guide