Bernardo Martinez is the Vice President of Microbusiness at PayPal, leading the company’s strategy for the smallest of businesses.
It’s widely recognized that small businesses are the engine of the global economy, and that is true now more than ever. According to the Economic Innovation Group, more than 5 million small businesses were formed in the United States in 2022 with about 34% of those planning to hire employees. This latter element is just as critical as the number of businesses formed, as small businesses are the bedrock of employing our communities. They employ more than 61.7 million people (including our neighbors), form beneficial partnerships, share knowledge with other business owners and contribute to their local economy.
However, there’s an old saying, “It takes money to make money,” and this is often the challenge for small businesses–having the money to make money. It can be hard for business owners to accurately forecast their cash flow needs when first starting. Once they’re up and running, they have the experience–and the data necessary–to better understand and predict their cash flow needs. Lacking the resources and time to improve their ability to forecast those needs is a key barrier to capital access for small businesses.
The recent events in regional banking and the continued increase of interest rates create additional hurdles for small businesses to access capital. The May 2023 National Federation of Independent Business (NFIB) Small Business Optimism Index found that 4% of respondents reported financing as their top business problem, while 24% of respondents reported paying a higher rate on their most recent loan.
Additionally, the NFIB report found businesses borrowing to finance expansion or equipment are paying higher financing costs. Combine these challenges with the time it takes to fill out an application and receive a decision and that’s valuable time that a small-business owner could use to focus on hiring employees, developing new products, creating new marketing campaigns and other revenue-generating activities.
Exploring alternative options for access to financing allows small businesses to access capital in new ways–especially for those in areas that may have been impacted by a reduction in traditional financial services. Small-business owners who have faced systemic barriers in accessing financing could have another potential tool in helping manage their small businesses through these new digital opportunities.
Digital channels allow small businesses to access capital that might not be readily available in their local communities–allowing them to reach new customers beyond their state and even country borders. Additionally, these digital finance companies enable this expansion by utilizing additional data to provide more innovative services than traditional ones.
This ability to go beyond the bank branch can help close the gap across the small-business ecosystem by giving small businesses another way to access the capital they need to grow and fortify an ever-critical state of the national economy. That said, the ecosystem needs additional support from all participants, including private and public, to help small businesses propel the economy.
The public and private sectors must work together to encourage responsible lending solutions that help open opportunities for historically underserved entrepreneurs and communities. Governments need to understand the impact of bank branch closures and consolidations in low- and moderate-income communities.
Education on this issue can lead to greater assistance in the form of new small-business policies–such as modernizing and expanding the legacy 7(a) Small Business Lending program in the United States. Finally, leaning into data can unlock stronger insights regarding the creditworthiness of small businesses–especially underserved entrepreneurs. Through technology like open banking, information can provide a clearer picture of a business’s health.
The private sector can do some things to encourage responsible lending solutions. Primarily, customers and industry participants can embrace new data enablement technologies such as open banking to have a more holistic view of small-business customers. The sharing of information helps provide a stronger picture of business health and allows creditworthy small businesses access to the capital they need. As a result, this can positively impact the global economy as well as the local communities that these small businesses serve, while breaking down psychological barriers that small-business owners face while considering a loan application.
In summary, no one company will be able to solve the challenges that small businesses face when accessing capital, but they can come together as an ecosystem–with the public and private sectors working together. The time to act is now to drive better capital access to small businesses, solidify our communities and accelerate economic growth.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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