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Open data could solve America’s poorly understood SMB credit crunch

A warmer embrace of open data could solve America’s small business credit crunch, a new Codat report suggests.

That is one finding from America’s SmallBusiness Credit Opportunity, a report conducted with polling from YouGov. It explains that while American small business credit demand remains high, many owners cannot access the credit they need to expand or survive.

Many businesses not getting needed credit

Last year saw many small business owners visit their preferred lenders. Almost half (47%) of the 32.5 million businesses received new or expanded credit. But 21% could not access credit at all. That’s 6.8 million American small businesses left wanting. Close to 80% of the unsuccessful said application issues were the main reason they couldn’t access credit. One in three cited high interest rates.

Alexander Cardona headshot
Alexander Cardona

The trend looks likely to continue in 2023, Codat co-founder and COO Alex Cardona said.

Close to two in three will try and access credit this year, with 90% fearing they could close if unsuccessful. Most (92%) SMB owners who couldn’t get credit in 2022 will try again in 2023. Nearly all (99%) denied credit in 2022 and fear closing their doors in 2023. Many need money faster than traditional lenders can provide it.

Business owners are on a tightrope as they contend with survival and expansion. Almost 80% (78) say they need the funds for expansion-related activities, while 75% say they also need it to survive. More than one in four (27%) need help with rising inflation.

The first stop for most small business owners is a large bank, but perhaps it’s time to rethink that. According to Biz2Credit, in 2021, the average U.S. big bank loan approval rate was 13.8%. The smaller bank rate was 19.1%, while the alternative lender percentage was 24.7%. (Compare that to the UK’s 75% approval rate.)

How open data can fill the SMB funding gap

Complex processes. Lengthy delays in receiving money. The most common reason for those delays is the time it takes to access and process data.

Give lenders detailed, verified, real-time data from SMBs’ financial systems. You’ve addressed data and decisioning delays that prevent 13.7% of US SMBs that needed finance from getting it due solely to system limitations. That contributes to higher acceptance rates without increasing risk exposure.

Connecting a business’ financial systems with lenders is simple so that quick decisions can be made. The process allows businesses to save time on paperwork while seeing what data lenders consider in their decisions. The business owner only has to approve sharing their data with the lender.

And most of them want to, with 73% willing to digitally share pertinent data, understanding that it will simplify the process and possibly deliver better rates. Of those business owners who’ve experienced past application problems, 98% are willing, with 92% of folks planning on borrowing in 2023 ready to share.

Larger businesses are even more willing to share. Those with 101-500 employees will share 84% of the time, while 71% of businesses with 100 or fewer workers will share.

Why are business owners willing to share? Better interest rates were cited by 27%, with faster approval and access to funds cited by 24%.

Lenders need an SMB mind shift

Compounding the issues faced by SMBs is that traditional lenders don’t seem to know how to serve them, Cardona observed. They are either treated like large corporations or consumer lenders.

“Most poorly understood is the broader societal impact, where small businesses make up more than half the economy in the US in terms of GDP, but make up between two to three percent of bank balance sheets,” Cardona said. “There’s something off there regarding the amount of credit that’s provided versus the economic value they provide. And the question that we’re always faced with is why.”

Banks will say they don’t know how to market to reasonable credit risks. Small business owners say the process is painful. The disconnect is apparent and is revealed in the finding that 13.7% of SMBs that may be good borrowers aren’t served.

He added that one lesson from the Silicon Valley Bank collapse the industry should heed is that regional community banks are still mainstay lenders.

One industry estimate has 30% of SMB loans from banks within 10 miles of their address. That gives those community-based lenders an opportunity, especially if they embrace technology. But with banks closing, it risks being opportunity lost.

Cardona said the solution begins with viewing SMB owners as a separate customer set. Then make sure the decision-makers understand their needs. Determine what data you need to properly store them, such as liquidity, seasonality, and ability to service the debt. That data is readily available. It just needs to be consumed in a way that allows for the proper analysis.

“The solutions are there,” Cardona said. “The appetite to embrace that journey, the vigor with which people are tackling the problem, is not what we would like to see.”

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  • Tony Zerucha

    Tony is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.