Small business owners are facing a cash crunch. The Federal Reserve’s July 2024 Senior Loan Officer Opinion Survey revealed that banks are continuing to tighten standards for loans to all businesses, including small businesses. That leaves many small business owners relying on either family or friends’ funds or their own personal savings to get their business up and running. This trend is far from a personal choice—it reflects the substantial barriers that small business owners face when seeking traditional financing. High interest rates and the lingering effects of bank failures have only made matters worse.
Business owners across industries share the same sentiment: traditional lenders are tightening their criteria, making it harder for them to secure loans. But leaning on friends or family is not a sustainable or accessible solution for the majority of budding entrepreneurs. As has been the case in the last few decades, where traditional financial institutions have failed, fintechs should rise to the occasion.
A survey conducted by Goldman Sachs found that more than half of small business owners cannot afford to take out a loan given current interest rates, and nearly 28 percent feel pressured into accepting predatory loan terms. This grim reality has left many small business owners hesitant to seek resources to improve their credit or pursue financing options to grow their businesses.
When businesses lack capital, the risk of failure increases. Three out of every ten small businesses fail because they run out of cash, leaving them unable to cover basic overhead expenses, fund expansions, or bring new products to market. Without sufficient capital, day-to-day operational expenses like rent, payroll, and insurance become harder to manage. Credit provides access to capital, but 28 million Americans are considered “credit invisible,” meaning they have no credit history with major credit bureaus. These individuals are effectively shut out of traditional lending opportunities because they don’t meet the strict requirements of banks.
Can Fintech Help?
This is where the opportunities for fintech companies are ripe. Fintechs must focus on these newly formulated and credit-invisible small business owners, closing the gaps left by traditional banks and providing entrepreneurs with new tools that help them take control of their financial futures.
For example, fintechs can create alternative solutions to help small businesses build their credit and access the financing they need to grow, especially without taking on additional debt. By reporting alternative transactions to credit bureaus, such as rent or utility payments, fintechs can help build businesses’ credit without needing to rely on taking out risky loans or credit cards.
Additionally, fintechs can offer credit-building cards for those with low credit scores or a limited credit history. Unlike traditional credit cards, these cards do not require a high credit score to open and are low risk – only allowing small businesses to spend the money they already have.
Finally, fintechs should invest in increasing small businesses’ credit literacy. Many small businesses do not understand what their credit score is and how it impacts their loan terms. Fintechs can address this issue by creating new tools to help small businesses monitor their credit.
Accessibility Matters
But for fintech solutions to truly make a difference, they must remain accessible to the small business community. Traditional large banks have long left small businesses behind, focusing on larger, more established businesses. Fintechs, on the other hand, have the chance to offer something different: flexible, user-friendly tools that make it easier for business owners to access capital, build their credit, and grow their businesses.
The path forward doesn’t have to be difficult. By providing alternative lending options and credit-building tools, fintech companies can help small business owners overcome legacy barriers to credit. Through innovation and a focus on accessibility, fintechs can play a pivotal role in helping small businesses gain the financial support they need to thrive in an increasingly competitive landscape.
Lilac Bar David is the Co-Founder and CEO of Lili, a financial platform that helps small business owners with financial management, streamlining banking, accounting and tax processes.
