Data Has Become the Fuel for Small Business Financial Stability

Main Street may be the soul of America, but its businesses find themselves increasingly embattled.

That’s because small and medium-sized business (SMBs) looking for credit or working capital and other financing solutions are often underserved and ignored by traditional financial institutions (FIs).

It is a damning double-edged sword: The worse the economic situation, the more the SMBs need help easing their cash flow shortages, but the less likely risk-averse banks and lenders are to help them.

Fortunately, new innovative and digital-first solutions are emerging that promise to help SMBs find the right fit for their needs.

The difference between these new products and those offered by giant incumbent banks and other FIs? It all boils down to data-driven decisioning.

From credit underwriting and alternative financing, data is the fuel that is helping the next generation of SMBs find their financial engine.  

And as access to working capital and other financing solutions continues to tighten due to macro pressures, many SMBs are increasingly looking to tap emergent financing solutions that help them better operate in today’s fast-evolving digital landscape.

Solving for Business Lending Frictions

One in three SMBs (33%) say that large, national banks are their preferred lender — but the legacy banking system wasn’t designed toward making it easy for unproven and newer businesses to get access to capital.

Still, many SMBs have shied away from using newer, digital options, including neobanks, due to a lack of education around their offerings.

But the Main Street financing situation is getting increasingly dire: Three-quarters of SMBs reported to PYMNTS that they would close within 60 days of a cash crunch. 

“What we’re seeing is an increase in need from small businesses for funding,” Scott Steinberg, chief product officer and chief operating officer at data intelligence platform Enigma Technologies, told PYMNTS.

While SMBs may be in the dark about newer lending solutions, that doesn’t mean the emergent class of digital providers are themselves uneducated around the needs of small businesses — in fact, they know them down to a T, thanks to the help of data.

And their multidimensional approach to the underwriting process could be just the thing that’s needed to give a critical lifeline to SMEs who are seeking to successfully navigate today’s macro environment.  

“We’re seeing an increase in interest … to leverage data that can help increase the approval rate and find those [SMB] populations,” Steinberg told PYMNTS last month (Aug. 2).

“The insights gleaned from alternative data [such as merchant services activities] can help a small business card issuer boost its approval rates significantly, improving SMB credit access in the meantime,” Steinberg added.

It may go without saying, but financing and cash flow are essential to the viability of a business. Firms with greater access to cash and financing sources are inherently less likely to be vulnerable to business closures, while at the same time are more likely to expect their revenues to grow.

And while many smaller firms lack the operating histories and therefore the credit profiles of their larger peers and competitors, findings in the PYMNTS study “Main Street Health Q2 2023: Credit’s Key Role in SMBs’ Plans,” a collaboration with Enigma, reveal a 63% increase in the share of SMBs planning to use business credit cards compared to those that have access to the credit solution today.

Get the research: Main Street Health

Data-Driven Decisioning

As more SMBs move toward FinTechs and online lenders, and away from traditional financial institutions, it will create a positive feedback loop where the data that underlies most credit underwriting decisions is captured and shared by the platforms leveraging it to create their financing products.

Even some of the larger players are starting to take notice.

Visa on Wednesday (Aug. 30) teamed up with credit decisioning platform Uplinq to help small businesses access credit, as reported by PYMNTS.

And when PYMNTS CEO Karen Webster spoke with Matt Baker, head of small business at Visa, earlier this year about the need for small business lenders to look past their standard considerations for loans, he explained that the traditional processes by which small businesses apply for credit, and the metrics by which FIs gauge risk and make decisions are both time-consuming and less than efficient.

“What small business owners want is a fast ‘yes’ or a fast ‘no.’ What they hate is a slow ‘maybe’ and then a ‘no,’” Baker said.