SMBs hit the hardest by recent banking crisis in US, research reveals

By Puja Sharma

According to new research, nearly a quarter (24%) of SMB leaders didn’t even try to get credit in 2022 and 13% used a personal loan for company purposes. Nearly all (99%) small business leaders who couldn’t get the credit they needed in 2022, are worried about going out of business this year.

As more than 21 million businesses (65%) will try to obtain credit over the next 12 months per Codat’s recent research, a lack of financial data will cause more businesses to be rejected than need to be, costing both the businesses and the lenders that could be serving them.

“There is a nearly $14 billion opportunity for US lenders if they can successfully address the issue of time-consuming, complex credit applications. Banks have previously been limited in their ability to facilitate data access because of legacy banking systems, lack of technology partners, and inability or unwillingness to build a solution in-house. Access to comprehensive, verified, real-time data from the financial systems used by SMBs empowers lenders to make more informed decisions and ultimately increases their loan acceptance rate without increasing exposure.” said Alex Cardona, Co-Founder & COO, of Codat

Why are SMBs unable to get credit?

SMBs couldn’t access the credit they needed in 2022 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 taking 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, 20% said the process was too complex. Again surprisingly, this rose to ten out of 38 among the larger SMBs. A further seven out of 38 said their application was rejected and for five of 38, it would have taken too long to get the money. It’s therefore clear that the application process itself is a significant barrier to small businesses accessing finance

SMBs are 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. The US small business market is highly dependent on external credit to operate, and the needs of SMBs are often not being met.

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. 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 lenders’ 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