SMBs (And Their Lenders) Rethink Their Financing Strategy

There’s no doubt that the small business community is facing a period of immense tribulation. In addition to navigating forced shutdowns and supply chain disruptions, business owners are now tasked with making some difficult decisions about how to keep their business alive, or whether to throw in the towel.

With so much financial hardship, the traditional avenues for funding that would otherwise be serving as vital lifelines for small and medium-sized businesses (SMBs) are often missing, and firms are looking beyond the big banks for financial support.

According to nonprofit Accion Opportunity Fund VP Adriana Eiriz, the uncertainty plaguing Main Street today is widespread.

“There is this feeling of an unsure future right now,” she recently told PYMNTS. “Small businesses are not even sure if taking on any debt is the right thing — even debt that is low-priced or highly subsidized.”

As Eiriz explained, the small business lending community has the opportunity, and perhaps even the obligation, to embrace collaboration and dig deeper into the entrepreneurial community in order to best serve SMBs and support the broader economy.

Helping SMBs Help Themselves

With 2020 such a volatile year, small businesses’ financials took a hard hit. Unfortunately, this has created an environment in which many SMBs are no longer viable candidates for traditional bank loans, though there are a multitude of alternative sources of capital, from FinTechs to government aid programs at both the state and federal level.

Even so, small business lenders are headed toward their own challenges when underwriting financing. Traditionally, lenders rely on historical data to understand borrower risk. But with 2020 having been such an anomaly, the financial performance of SMBs last year may no longer be the best predictor of their potential successes ahead.

What’s more, as Eiriz noted, many small businesses embraced the business model pivot to survive, from brick-and-mortar retailers migrating to eCommerce platforms, to restaurants shifting to food trucks. While these pivots reflect the resiliency of small business owners, they can also make it more challenging for lenders to understand how a business operates.

It’s vital for lenders like Accion Opportunity Fund to explore potential borrowers in the context of the pandemic, as well as in the context of how those businesses have helped themselves through the volatility. That means, she said, looking beyond mere transactional data.

“We really do look at the story behind those documents presented, and at the story behind how these businesses are trying to pivot,” she said.

A Collaborative Spirit

Lenders need to embrace the opportunity to collaborate with the small businesses they are financing in order to gain better visibility into that company’s performance. With a flurry of new offerings available, the lending community must also work together to expand awareness and education of the various programs and initiatives that have emerged to support the small business community.

“We think that now, more than ever, industry collaboration is key,” said Eiriz. “It’s incredibly important for public and private sectors to work together. It allows us to extend our reach to more small businesses that need help.”

With that in mind, Accion Opportunity Fund recently announced its own partnerships with multiple credit unions as it makes progress toward its $1 billion small business investment commitment.

With another round of Paycheck Protection Program (PPP) funding ahead, small businesses will be tasked with navigating an even more complex and often confusing lending landscape. At the same time, both small businesses and their lenders will also be bracing for the future as they plan for what comes next after government funding runs dry.

Though the future is largely uncertain, Eiriz is confident that the Main Street community will emerge from the turmoil.

“Small business owners are so resilient,” she said. “I am a hopeful person, and in my career I’ve been able to see these small business owners feel that this is a moment for them to become even stronger, and look at their business differently.”