According to Mercator Advisory Group, 64% of small and medium businesses (SMBs) report having financial challenges. Additionally, 69% have used personal funds and personal credit to meet those financial challenges.
Financing has always been a challenge for SMBs, and COVID-19 has only exacerbated that problem. According to the Biz2Credit Small Business Lending Index, overall loan approval rates in December 2020 were down over 50% vs. December 2019. Big banks only granted 13% of small business loan applications vs. 28% in December 2019. Over the same period, small bank lending dropped even more dramatically, from 51% of loan requests to just 18%.
There are a lot of reasons for the sharp decline. A number of small businesses were hurt badly by the pandemic and likely determined too risky in the current environment. In other cases, small business owners simply lack a proper credit history or suffer from poor credit ratings from the past. Either way, they can’t get access to the credit they need—either in the form of loans or business credit cards— to maintain and grow their business.
The problem is traditional credit issuers are ill-equipped to meet the needs of small businesses. For one, they are overly risk-averse and they try to manage that risk with irrelevant data, passive processes, and stale credit monitoring that does not accurately reflect a small business’ true credit worthiness. As a result, issuers push small businesses to low revenue/low risk pre-paid debit cards which require personal guarantees or expensive revolvers. Other options such as Buy Now, Pay Later-type solutions for businesses can increase short-term buying power, but they also come with high fees and do little to help build credit lines for the longer-term health of the business.
Small businesses require more flexible financing alternatives that are better suited to their specific needs and set them up for long-term success and financial independence rather than continuous struggle and revolving debt. They need tools that enable them to use their cash flow and credit more easily instead of putting up barriers that restrict their options.
- Eliminate personal credit scores and guarantees from the process. Evaluate the credit worthiness on the business, revenues, capital requirements and cash flow.
- Offer small businesses a credit vehicle that combines a credit card with a line of credit.
- Consolidate the small business’s spending on that card and integrate it with the merchant’s credit card processing system to make managing cash flow automatic and easy.
- Let merchants designate a portion of their daily settlement to be deposited into their credit account and automate those deposits.
- Make those funds available to the merchant immediately to effectively run and invest in their business.
- Automate daily deposits to the card and eliminate the need to worry about paying bills monthly and keep interest fees that cut into merchants’ bottom line to a minimum, even zero with regular settlements.
This approach helps small business owners avoid relying on personal credit cards, high interest term loans and merchant cash advances or personal assets to fund their business. It allows them to use their personal credit more efficiently and avoid amassing personal debt that could create credit issues and affect their ability to make future personal and business investments. By consistently paying off or paying down their balance, they can build their credit without incurring more and more debt. It also builds up a cash reserve that can then be used when an emergency need arises.
Small businesses face unique credit and cash flow challenges that need to be addressed with innovative thinking. We can’t solve the problem by trying to retrofit traditional tools. That has been proven over and over again.
Eugene DeSilva is the General Manager, Small Business Credit Solutions and PayVus for Aliaswire, Inc., a Massachusetts-based fintech company that works with banks and businesses on digital payments and credit. Eugene has over 25 years of experience in the global payments industry working with small and mid-size businesses at MasterCard, American Express and CIBC.