Financial exclusion is not just a social issue, it’s an economic waste. SMEs are the backbone of the global economies, yet too many of them find it hard
to access capital, not for lack of potential, but because mainstream financial systems are not structured to serve them.
Adam Smith, in The Wealth of Nations, wrote: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from
their regard to their own interest.” That is, markets function most effectively when firms can operate efficiently. Yet today, banks continue to disregard millions of prospective SMEs because they don’t fit into old credit models. This isn’t just an opportunity
for entrepreneurship lost, it’s a failure of the financial system for getting capital to where it’s most needed.
There is backing for this challenge in current economic trends. UK GDP is predicted to grow at just 1.7% in 2025, and it is reported that 49% of SMEs find
access to finance worsening (British Chambers of Commerce, 2025). Meanwhile, innovative fintech solutions are offering smarter, more responsive models of funding, but adoption is sluggish due to regulatory barriers and market inertia.
I wrote about this in
Financial Inclusion in 2025: Will Fintech Finally Close the Gaps?, where
I explored how outdated risk assessments systematically exclude promising businesses, stifling market competition and limiting economic growth.
Having worked across both banking and fintech, I’ve observed how financial exclusion limits competition, slows innovation, and prevents businesses from
reaching their full potential. I discussed this in
Why Non-Dilutive Funding is the Future for SMEs—but non-dilutive finance
is more than an alternative; it’s the future of SME lending.
In this article, I’ll break down:
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How exclusion from traditional financing limits economic productivity
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Why alternative funding models better align with modern business needs
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How financial institutions and fintechs can adapt to drive real inclusion
Financial exclusion is not just an issue of equity, it’s an issue of ensuring that capital is directed to where it will be most useful. The financial sector
has a choice: revise its approach to financing SMEs or continue leaving economic growth on the table.
1. The Economic Cost of Financial Exclusion
Financial exclusion is not just an issue for underserved businesses—it’s a drag on economic growth. SMEs account for over 90% of businesses globally, yet
many are excluded from mainstream funding due to outdated risk models and rigid lending criteria. This gap doesn’t just hurt individual businesses—it undermines market competition, stifles innovation, and slows job creation.
A Missed Economic Opportunity
The latest estimates put the global SME financing gap at over $5 trillion (World Bank, 2025). In the UK, SMEs account for over 60% of private sector employment
yet nearly half struggle to access finance (British Chambers of Commerce, 2025). This financing gap limits:
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Investment in technology and expansion, slowing down business growth.
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Hiring capacity, reducing the creation of jobs.
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Competition in the market, allowing large incumbent firms to consolidate their positions.
A financial system that cannot serve SMEs is not just an issue for business owners—it’s a capital allocation failure that holds entire economies back.
The Credit Model Is Outdated
Traditional banking still relies on collateral-based lending, rigid credit scores, and historical financial statements—metrics that don’t account for the
potential of digital-first, high-growth SMEs. As a result, many viable businesses are rejected despite having healthy cash flows and scalable models.
Far from enabling inclusion, these legacy financial models perpetuate existing imbalances, disproportionately impacting:
- New and fast-scaling businesses, with thin credit files.
- Women- and minority-owned enterprises, which data shows receive significantly less funding than their counterparts.
- E-commerce, SaaS, and asset-light industries, where growth is not reliant on physical assets.
Adam Smith’s principles of free market efficiency ordain that capital must flow where it is most productive. But the financial system of today does not allocate
funding efficiently, causing companies to endure clunky, outdated processes just to access the capital they need to thrive. This is where alternative funding models can be a game-changer, not just for businesses but for the economy as a whole.
2. The Business Case for Financial Inclusion
Financial inclusion is often framed as a moral imperative, but its advantages extend far beyond ethics. Opening up access to capital for SMEs drives innovation,
improves competition, and fosters long-term economic resilience. If financial systems fail to serve potential businesses, economies miss out on productivity increases, job creation slows, and industries become less competitive, as discussed in
Fintech Predictions for 2025: What’s Next.
Unlocking Market Potential
Having increased SME financial access has measurable economic benefits:
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Raises GDP growth – More intelligent, better-capitalized SMEs open more widely, making countries more productive.
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Facilitates job creation – SMEs generate huge numbers of new jobs, but financial exclusion truncates their job-creation capacity.
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Resilience-building in markets – Diversified, well-collateralized SME market avoids over-reliance on large businesses.
A recent McKinsey report found that improving SME financial inclusion would add up to $3.7 trillion to global GDP by 2030 (McKinsey, 2025). It’s not just
a question of equitable distribution of capital —it’s an economic potential lost that affects overall market performance.
Why Traditional Finance Falls Short
Traditional lending models remain based on outdated risk judgments on:
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Long credit histories, which exclude early-stage, high-growth companies.
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Collateral-based requirements, which make it difficult for asset-light companies (e.g., SaaS, e-commerce) to fit in.
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Manual underwriting processes, leading to slow, inefficient credit decisions that cannot keep pace with the velocity of today’s SMEs.
These constraints disproportionately hurt:
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Early-stage and digitally native companies that rely on cash flow rather than tangible assets.
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Female and minority-owned SMEs, which studies show receive a significantly lower percentage of funding than their counterparts.
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Export-led and high-growth companies, which are more likely to require faster, more flexible sources of capital.
The Role of Alternative Funding Models
New financial models are shaking up traditional lending models, offering more affordable and flexible capital:
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Flexible lending products, with repayments aligned with cash flow, keeping the pressure on SMEs at a minimum.
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Embedded lending, which embeds lending on business platforms, doing away with unnecessary application obstacles.
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Alternative credit scoring, using real-time data analytics instead of rigid historical records.
Providing SMEs with better financial instruments is not a fringe topic —it’s needed to release the next wave of economic growth. Banks and financial institutions
that refuse to shift how they address SME finance will get left behind while fintech-fueled alternatives reshape SME finance.
3. Strategies to Enhance Financial Inclusion for SMEs
Solving financial exclusion takes more than visibility—it needs structural transformation in the way businesses get access to capital. The conventional models
of financing are still rigid and outdated, while a number of SMEs lack financial visibility, face regulatory hurdles, and have limited access to customized funding options.
1. Enhancing SME Financial Visibility
One of the biggest hurdles for SMEs is not so much getting finance, but being able to prove that they qualify for it. Few businesses have consistent, current
financial data, making it difficult for lenders to assess their risk profile.
A recent survey found that 40% of SME owners had financial data that was not in line with their expectations, indicating a lack of financial transparency
and business intelligence (Startups Magazine, 2025). Without visibility into cash flow, revenue cycles, and debt obligations, SMEs cannot:
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Demonstrate creditworthiness to lenders who require regular financial reporting.
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Make borrowing decisions that are well-informed by real cash flow projections.
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Access funding on more level terms rather than being relegated to high-risk brackets.
The solution: Digital accounting tools, alternative data and AI-driven financial analysis are helping SMEs bridge this divide, giving lenders real-time insights
into a firm’s financial health rather than having to rely on outdated historical data.
2. Expanding Alternative Funding Models
The rigidity of collateral-based lending and credit score dependence implies that numerous businesses cannot access capital. Alternative funding models offer
more adaptable, performance-based financing structures, including:
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Flexible financing for growth– Where repayments flex with revenue generation, making capital more sustainable.
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Embedded finance – Integrating funding directly into business platforms, reducing friction and manual applications.
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Invoice and supply chain financing – Unlocking capital tied up in unpaid invoices or procurement processes
A Deloitte study of SME lending found that traditional underwriting fails to capture genuine business potential, whereas fintech-based approaches using real-time
transaction data and AI risk analysis significantly improve funding availability (Deloitte, 2025).
3. Reinventing Risk Assessment in SME Lending
Traditional lending emphasizes historical financial data and credit scores, but this works against new, high-growth companies. AI-powered risk models, open
banking data, and alternative credit scoring are revolutionizing SME lending by:
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Considering present financial performance rather than outdated statements.
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Inferring creditworthiness based on behavioural analytics of transactional data.
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Expanding access to finance by removing stringent legacy criteria.
A World Bank report highlights that alternative credit scoring can reduce loan rejection rates by up to 30% in unserved business segments (World Bank, 2025).
The Future of SME Financial Inclusion
The Future of SME Financial Inclusion
Businesses that fail to access capital limit their own growth, and lenders and banks that fail to innovate will forego a multi-trillion-dollar opportunity.
The trend towards real-time financial data, new lending models, and AI-driven underwriting has started, but uptake needs to speed up.
The future of SME finance has to be faster, fairer, and tailored to support new businesses—not just those that are a good fit for traditional financial models.
What’s the greatest hurdle SMEs have in getting funded today? Let’s talk.
