As economic uncertainty continues to impact small and medium-sized enterprises (SMEs), new research is out CodesThe Global Small Business Data API shows that more than one-fifth (21%) of American small and medium-sized businesses surveyed did not have access to the credit they needed in 2022.
The new report from Codat, Loan Opportunity for Small Businesses in America, highlights that the application process itself is the biggest barrier for small businesses to gain funding. Of the small and medium-sized businesses that did not have access to the credit they needed in 2022, 78% said it was due to problems applying. These include application costs that are too high (e.g. set-up fees) and the application process is too complicated and time-consuming to obtain funds.
Loans will also have top priority in 2023
Despite the challenges of 2022, 92% of SME executives surveyed who did not have access to the credit they needed last year will try again this year. As the economy continues to change and banks and lenders reassess their lending practices and risk profiles, many corporate leaders are looking to borrowing options to fill a gap in their core business.
Overall, about two-thirds of SMB executives surveyed (65%) will seek access to business credit this year, of which 75% will do so for essential activities such as shopping. B. paying existing employees or supporting general cash flow. Specifically, nearly 1 in 4 (23%) of SMB executives surveyed who plan to access credit in 2023 say it will pay existing employees, and 27% say it helps with inflation.
The events of the past few weeks in the US banking sector pose an additional threat to access to credit for small and medium-sized businesses. Firms are shifting their banking relationships to larger banks, where loan approval rates are the lowest at just 13.8%, amid increasing regulation and pressures on regional banks’ operating costs will drive up capital costs.
Arguments for open financing
The report presents digital data sharing initiatives as the greatest opportunity to expand access to credit without increasing risk for lenders.
“As access to credit deteriorates in the short-term, it is crucial that banks act now to implement digital data sharing to prevent SMEs from being further harmed,” said Alex Cardona, COO of Codat.
“Technology that improves access to comprehensive, reliable, real-time data from financial systems used by SMBs enables lenders to make informed decisions and ultimately increases their acceptance rate without increasing risk.”
The study shows that SMBs are willing to provide instant and frequent access to financial data in exchange for better interest rates and a simpler application process, with 73% of respondents willing to share data directly with lenders:
- Of those expected to receive a loan in 2023, 92% are willing to share at least some data from their financial systems directly with lenders.
- 84% of larger SMEs (101-500 employees) are willing to share at least some data with credit providers, compared to (a large majority) 71% of smaller SMEs (1-100 employees)
“The system offered by alternative lenders is beginning to address issues with the unfriendly process and leading to more successful access to credit, but lenders of all types and sizes, including large banks, must embrace data portability to meet market demands,” continued Cardona away.
By learning from the success of alternative lenders, financial institutions can build more robust products, reach customers faster, and reduce costs by accessing accounting, banking, and trading data. If U.S. lenders manage to address the systemic issues of complex and time-consuming applications to give these companies access to capital, there is an approximately $14 billion opportunity for lenders.
