Credit access is a major challenge for SMBs in the US, study shows

By Puja Sharma

As economic uncertainty continues to impact small and medium-sized businesses (SMBs), new research shows that almost half (47%) of the 32.5 million small businesses in the US took out new credit or expanded existing credit in 2022, but 21% could not access credit.

The report, America’s Small Business Credit Opportunity from Codat, highlights that loan acceptance rates in the US are low, particularly at larger banks where most small businesses attempt to access credit.

Higher demand for credit in 2022

According to our research, almost half of the businesses surveyed (47%) took out new credit or expanded an existing credit facility in 2022, significant when considering the 32.5 million small businesses in the US.

Nearly a third (31% – equivalent to just over ten million SMBs) had already accessed funding. In contrast, just 24% of businesses surveyed did not try to get any form of credit whatsoever in 2022. This is our first solid indicator of the critical role credit plays for SMBs in the US. But while most businesses are interacting with credit in some form, the data also tells another, more concerning story.

Among the small and medium business leaders that did not access credit in 2022 (either did not attempt to, or needed to but couldn’t), the most common reason was that they didn’t need it. This was the reason cited by 56% of SMBs surveyed. Interestingly, the smaller the company, the less likely they are to require additional funding. Most (61%) organizations with between one and 100 employees surveyed did not need it, compared to less than a third (12 out of 38) of business leaders who were asked with between 101 and 500 staff.

What prevented businesses from accessing credit?

The research reveals that 21% of US SMBs surveyed needed credit in 2022 but were unable to access it, which could be equivalent to around 6.825 million businesses. Of this 21%, the most common causes – reported by 78% – were application-related problems. This refers to application costs (such as origination fees) being too high, the application process is too complex, and it takes too long to get the money.

For a third (33%), high-interest rates making loan repayments unaffordable posed the main stumbling block. Simultaneously, a further 13% of SMBs surveyed felt the need to take out a personal loan to fund their business in 2022, indicating that it was more feasible than securing one for their business. Among the businesses that did not attempt to access credit or needed it but couldn’t get it due to various loan complexities.

SMBs remain persistent in their demand for credit in 2023

Looking at 2023 and beyond, the anticipated demand for credit does not seem to have been impacted by the shifting economic climate. Most (65%) small businesses in America will try to access credit over the next twelve months.

This could represent over 21 million businesses. The need for credit is high among all businesses, although it does increase with size – 81% of medium sized businesses (101-500 employees surveyed) are likely to try to access external funding in 2023 compared to 61% of smaller businesses (1-100 employees). Nestled within the high demand for capital, the data highlights flaws in the credit system for small businesses. Not only is demand high, but it is also persistent. Of the small businesses surveyed that sought credit in 2022 but couldn’t access it, 92% intend to apply again in 2023.

There is an immense gap in the business banking market: 6.8 million small businesses couldn’t access the credit they needed in 2022. This is endangering small businesses whilst also representing a significant financial opportunity for providers.

Way Ahead

Despite the access challenges, demand is still high: 65% of SMBs will look for credit in 2023. Leveraging technology to improve data flow can achieve higher loan acceptance rates and increased application success rates without increasing lender’s risk exposure. Progress has been slow, but the evidence suggests that Open Finance will be a success: 73% of small businesses are willing to share their financial data directly with lenders.

The alternative lending market has shown promising signs derived from technology-driven processes, but this only represents the tip of the iceberg. It’s down to the lending industry as a whole to use the technology at its disposal and revolutionize the landscape.

Key highlights:

• Over 21 million businesses (65%) in America will try to access credit over the next twelve months.
• Around 90% in need of credit fear, lack of access will threaten business survival.
• About 92% are willing to share their data with lenders throughout the term of the loan, including giving lenders direct access to their financial systems.
• Over 73% of all small businesses are willing to share their financial data directly with a lender in exchange for better rates and an easier application process.