A strong credit supply is the lifeblood for economic growth - but Europe’s SMEs, that make up 99% of all businesses, still face a persistent gap in available financing estimated at some €400bn. Whilst a potentially highly profitable segment, currently these businesses are too difficult to reach and too costly to serve for traditional banks given those lenders’ structural costs; and for the SMEs, credit products from undigitized alternative lenders are still too often inflexible and ill-suited to their use cases.

We have therefore seen strong growth in demand for digital disrupters that address these challenges to support this underserved segment. We are seeing innovation at the product level with providers offering more flexible credit solutions and repayment plans that better suit the needs of SMEs; and at the distribution level, where disrupters are increasingly meeting SMEs through platforms and channels that are more closely tied to their operations.

There are a range of players in the space that offer different credit solutions, focusing on a variety of segments and channels from traditional offline businesses and sole-traders to digital-native e-commerce brands. Many players tend to start in one product and vertical focus with a as a wedge, expanding their footprint over time into different areas. Broadly we are seeing greatest demand in B2B BNPL, supplier and inventory financing, revenue-based financing and flexible revolving credit facilities.

Many funds find SME lending a more challenging area in which to invest given the complexity of the operating model and capital stack, as well as the valuations of scaled lenders that tend to trade on book multiples. We recognise these challenges, but also see lending as one of the highest-potential areas for fintech to scale profitability and create value over time.

We believe that successful disrupters will win by owning scalable channels that give them proprietary access to borrowers and data, driving efficiencies in their cost of distribution and cost of risk.

It’s for that reason that we are particularly keen on embedded credit models that display strong network effects. For example, we are proud to have invested in Billie, the leading European B2B BNPL player, that is already serving hundreds of thousands of unique SME buyers through scalable PSP distribution channels such as Adyen and Stripe. As a result, Billie not only sees the same buyers across multiple merchant stores but has an extremely low cost of acquisition, with and can monetise these buyers through additional payables product such as credit cards or receivables lending over time to drive a best-in-class LTV/CAC.