How Fintechs Are Helping Small Businesses Thrive With Alternative Lending

In recent years, small businesses have created two out of every three new jobs in the US in a variety of ways, including starting new ventures, expanding existing operations, and filling gaps in local markets.

The 2022 annual report published by the Office of the Advocate for Small Business Capital Formation discloses the continuous hardships faced by small businesses of which raising investment capital is the primary obstacle—“75% of entrepreneurs have experienced challenges in obtaining capital” in the past year. However, fintech companies are reshaping the SMB market by streamlining loans and leveraging AI technology.

Small businesses are often described as the engine of US job growth, as startups account for about 20% of US gross (total) job creation while young, high-growth businesses account for almost 50% of gross job creation (source: Journal of Economic Perspectives—Volume 28: The Role of Entrepreneurship in US Job Creation and Economic Dynamism).

In fact, they have accounted for 66% of employment growth over the past 25 years, and 61.7 million Americans, i.e. 46.4% of U.S. employees are employed by small businesses.

But despite the startup rush keeping its momentum, working capital stands in the way of small business growth. Stats reveal:

  • 89% of entrepreneurs say access to capital is limiting their business growth potential.
  • 78% of entrepreneurs say access to capital is limiting their day-to-day operations.
  • 73% of owners are looking for support in preparing to apply for and using business financing.

Although 5.4 million new business applications were filed in 2021, which is more than 20% higher than any previous year on record, several businesses, especially early-stage entrepreneurs report struggles and need support as they build new companies.

According to the Federal Reserve Banks, “Many small businesses have not recovered to pre-pandemic levels, in terms of both revenue and employment, with the effects of the pandemic hitting disproportionately hard among firms in the leisure and hospitality sector, smaller firms, and firms owned by people of color.”

The aforementioned annual report further states that in 2021, out of the 34% of firms that sought financing, 12% received none, indicating a 24% shortfall.

Nonetheless, fintech solutions have come to the rescue by helping minimize cash flow challenges with their tech-focused options, supporting a considerable number of entrepreneurs to scale their businesses.

Did you know that about 80% of small business loans were rejected by big banks in 2019?

While traditional lending services make assessments on the basis of a business’s credit score, tax returns, liquidity, and a number of other factors, neo-fintech lenders are carrying out their assessments more intelligently, based on several digital data points.

For instance, Neo Banks aka Challenger Banks, such as Novo, NBKC Bank, Bluevine are meeting key banking needs of SMBs, including broad, easy, and inexpensive access, quick and easy decisions, and comprehensive services.

As debt is considered the #1 barrier to SMB loans, almost 44% of small businesses failed to strike the eligibility criterion to receive financing in 2019. Thanks to tech disruption that is eventually gaining priority, making things much more favorable for small businesses. Based on firmographic (such as years in business, annual revenue, industry, and owner’s personal credit) as well as a multitude of digiographic signals (such as website traffic, brand of CRM and payment solutions used, ad spend, digital investment, and more) alternative lenders are checking businesses’ credit-worthiness while helping lenders process and approve loans.

BuzzBoard has 6,400+ of these digiographic signals that are prescriptive, forward-looking, and B2B equivalent of ‘psychographics’—helping lenders deliver consolidated solutions by generating digital health scores and adding credibility dimensions to SMBs.

A majority of SMBs (79%) plan to offer contactless services, which is particularly true for those in the consumer goods, retail, and technology industries.

Moreover, BuzzBoard has been constantly expanding its inventory of data signals about small to medium-sized businesses and has activated two broad categories of SMB financial data, credit health and funding for reinforcing SMB-focused sales. Our purpose is to make all these digital signals more actionable across industry verticals.

“Nearly 70% of small business owners told us they plan to apply for funding to combat inflation this year.”

—Elizabeth Gore, Cofounder & CEO, Hello Alice

Evidently, it would take a holistic approach to overcome the capital crunch for SMBs. And the good news is, the 42nd Annual Small Business Forum, hosted by the Office of the Advocate for Small Business Capital Formation, is expected to take place in April 2023. This unique event will witness a gathering of public and private sector members to exchange feedback with the motto of improving capital-raising policies. Optimistically, with the new regulations being already proposed by the SEC for 2023, fresh business transforming policies will come up to support SMBs in tackling the ongoing financial crises.

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