In Banking, The Line Between SMB And Consumer Can Blur

In the world of small business financial services, entrepreneurs’ frustrations with banking have been loudly vocalized: firms are often considered too small to be profitable for banks’ corporate services units and are therefore pushed into an FI’s consumer banking operations.

That means small business owners are forced to rely on financial services products designed for the consumer, even though an SMB’s needs are more complex and need to scale as a company grows.

This challenge has led to an influx of challenger banks and FinTechs specifically targeting startups, solopreneurs and small- and medium-sized businesses. But these gripes still exist: Many banks often rely on a business owner’s credit score to underwrite a business loan, for instance, while business owners themselves will often use personal credit cards to make company purchases.

In Australia, this blurred line between small business and consumer financial services became the focus of a recent SmartCompany report highlighting the challenge that small business owners face when seeking working capital.

According to Australia’s Reserve Bank Assistant Governor Michele Bullock, SMBs are facing a tighter market in their search for working capital, and it’s wedging these businesses into consumer credit products.

“Small businesses have been facing tighter credit conditions over the past year or so from a level that was already tight,” she said at a Toowoomba Chamber of Commerce event held last week, reports said. Companies with an annual turnover below $50 million are particularly affected by the trend. There is a “blurring in the line between lending to small business and personal credit,” she added.

“Lenders are increasingly treating small businesses as household borrowers,” she continued, “imposing the stricter conditions on small business lending.”

Reports noted that it is difficult to obtain exact figures on small businesses’ use of personal credit products like consumer credit cards or loans, though it’s not a new phenomenon — and it’s not a trend limited to Australia.

A July 2018 report from alternative small business lending platform Fundera found that small businesses often use personal cards for business expenses, with 23 percent of business owners admitting to mixing both individual and company purchases on their cards.

This is not surprising, Fundera Vice President of Content Meredith Wood said in an interview with WTOP at the time, considering the evolution an individual may experience from consumer to solopreneur to entrepreneur to small business owner.

But that mix is not a smart tactic for managing company spend and finances.

To make matters even more confusing, the definition of a small business is often ambiguous both to regulators and to banks. For micro-enterprises, it can be especially tricky for financial service providers to correctly size their product offering to the client.

Earlier this year, the Australian Banking Association announced changes to the industry code of practice, which raised concerns over how the government defines a “small business.” And while the Australian Securities and Investment Commission approved of a new definition of a small business when it gave clearance to the ABA’s new code of conduct changes, the ABA also warned that “the industry has serious concerns that this recommendation may have a material impact on access to credit for small business borrowers.”

Again, this issue is not isolated to Australia.

Last October, the Federal Deposit Insurance Corporation (FDIC) released a report that suggested the U.S. market is significantly underestimating traditional banks’ small business lending volume because of how a small business is defined.

“There is no comprehensive measure of small business lending by banks,” the FDIC’s 2018 Small Business Lending Survey report warned, pointing to a lack of standardization in the definition of a small business in the U.S.