Research: America’s Small Businesses Threatened by Inability to Access Needed Credit

As economic uncertainty continues to impact small and medium sized businesses (SMBs), new research from Codat, the universal API for small business data, shows that over a fifth (21%) of US SMBs surveyed couldn’t access the credit they needed in 2022.

The new report by Codat, America’s Small Business Credit Opportunity, highlights that the application process itself is the biggest barrier to small businesses accessing finance. Of the SMBs that couldn’t access the credit they needed in 2022, 78% said it was because of problems with the application process. This includes application costs (such as origination fees) being too high, the application process being too complex and it taking too long to receive the funds.

Credit Still a Top Priority in 2023

Despite challenges in 2022, 92% of the SMB leaders surveyed who couldn’t access the credit they needed last year, will try again this year. As the economy continues its shift, and banks and lenders reevaluate their lending practices and risk profiles, many business leaders are looking towards credit options as a stop-gap for basic operations.

Overall, around two thirds of small and medium business leaders surveyed (65%) will try to access business credit this year, 75% of which are doing so for survival activities, like paying the salaries of existing staff or helping with general cash flow. Specifically, nearly 1 in 4 (23%) SMB leaders surveyed planning to access credit in 2023 say they’ll use it to pay existing staff and 27% say it’s to help with inflation.

The events of the past few weeks in the US banking sector pose a further threat to SMB credit access. Businesses are moving their banking relationships to larger banks where loan approval rates are the lowest, sitting at just 13.8%, while increased regulation and pressure on the operating costs of regional banks is set to push the cost of capital higher.

The Case for Open Finance

The report presents digital data sharing initiatives as the biggest opportunity to widen access to credit without increasing risk for lenders.

“As access to credit stands to worsen in the short term, it’s vital the banks act now to implement digital data sharing to avoid further disadvantaging SMBs,” said Alex Cardona, COO of Codat.

“Technology that improves access to comprehensive, verified, real-time data from the financial systems used by SMBs empowers lenders to make more informed decisions and ultimately increases their acceptance rate without increasing exposure.”

The research shows that SMBs are willing to give real-time and recurring access to financial data in exchange for better rates and an easier application process, with 73% of those surveyed happy to share data directly with lenders:

• Of those likely to access credit in 2023, 92% are willing to share at least some form of data from their financial systems directly with lenders.
• 84% of larger SMBs surveyed (101-500 employees) are willing to share at least some data with credit providers compared to (a still large majority) of 71% smaller SMBs (1-100 employees)

“The system offered by alternative lenders has begun to address unfriendly process-related issues and is resulting in more successful credit access, but lenders of all types and sizes, including large banks, must embrace data portability to meet market needs,” Cardona continued.

In learning from the success of alternative lenders, financial institutions can build more powerful products, onboard customers faster, and reduce costs with consented access to accounting, banking, and commerce data. If US lenders can address the systemic issues of complex and time-consuming applications to allow these businesses to successfully access capital, there is a nearly $14 billion opportunity for lenders.