Platforms, Alternative Lending Sources Help Fill Small Businesses’ Capital ‘Gap’

Banks’ pullback on small business lending is creating an opportunity for FinTechs to step in.

In data released on Tuesday (Jan. 10), small business financing firm Biz2Credit noted that there’s been little to no growth in lending to small- to medium-sized businesses (SMBs).

As for the big banks, small business loan approval percentages fell from 14.6% in November to 14.5% in December, the lowest levels for the year. Similarly, year-end reports from the Federal Reserve Bank of Kansas show declines in small business lending activity.

The Fed’s data shows that new small business loan balances decreased 22.1% compared with the previous year, driven by a 24.5% decrease in new term loans and a 17.7% decrease in lines of credits. Demand is waning a bit, and rising interest rates point to reluctance of SMBs to take on loans.

The new year, then, is dawning as one where smaller firms’ access to capital will be tough to come by.

PYMNTS own data shows that two thirds of main street SMB owners expect a recession. The National Federation of Independent Business has reported that small business optimism has worsened, and the general expectation is that a recession looms. Per the NFIB, 55% of business owners reported making capital outlays in the last six months.

Still Investing in Operations

There’s a persistent need, then, for SMBs to fund operations, and make selective improvements, when possible, even with stubborn inflation and decreasing profit margins in the mix. And, generally speaking, traditional lending conduits are filled with friction. For instance, SMBs may have limited operating histories, or their owners’ personal FICO scores may be used as proxies for the actual creditworthiness of the operation itself.

As reported by PYMNTS in recent weeks, leveraging data is helping to gauge of a business’s financial health is helping get credit extended where it’s needed. FlowCast and Tillful, by way of example, have sought to transform  underwriting by finding new metrics for SMBs.

As access to credit improves, creditworthiness improves, too.

“If you look at how traditional credit reporting agencies do underwriting or credit assessment, it’s based on what they call trade lines, and trade lines are like Home Depot or Costco reporting payment terms or the payment history of the customer to credit report agencies,” FlowCast/Tillful CEO Ken So told PYMNTS.

“It takes months, if not years, to build a credit report” that way, he said.

The bank level data mentioned above shows that the capital that would mollify at least some of those pressures is no sure thing; the vagaries of B2B payments — late payments and paper-based payments — have given rise to a trade credit standstill where more than $3 trillion is owed to U.S. firms (specifically, in their accounts receivable) on any given day.

Payment platforms such as PayPal, then, are finding a growth business here, using the data that wends its way across their own platforms.

PayPal noted that it has extended more than 850,000 business loans in the U.S., with $17 billion in loans extended in the past 10 years.  Elsewhere, Shopify noted in its most recent earnings report that through Shopify Capital, available in four countries, merchants in these countries received $507.6 million in merchant cash advances and loans from Shopify Capital in the third quarter of 2022, an increase of 29% year on year.