The small to midsize business owner carries a weight on his or her shoulders, and a heavy one at that. It’s no mean feat to be the engine that drives job creation and the U.S. economy as a whole. Curious, then, that access to credit — which might be termed the fuel for the engine — can be hard to come by. Yet, as Fundbox CEO Eyal Shinar noted to PYMNTS’ Karen Webster in the latest Data Drivers, traditional access to traditional lending has become anything but tradition for the smallest players seeking to grow and make their presence felt in corporate America.
Data Point One: 104.5
This is the latest reading of the small business optimism index, which was off a little bit in April, as Webster noted, but the sixth straight month of high levels of optimism, with readings not seen in decades. But conversely, she said, only 9 percent of small businesses are interested in applying for credit. The disconnect, said Shinar, has nothing to do with the level of optimism displayed by a small businesses, but is tied to the fact that only 15 percent to 20 percent of small business owners get the full amount of credit for which they apply.
The problem is one of process, where banks analyze everything from how long a firm has been in business to how much revenue is generated per employee to what the personal FICO score of an owner may be.
If you don’t get through the pre-qualification process, the executive surmised, you do not even get to show up in the 80 percent of those who are rejected when applying for credit.
There’s also the time value of money to consider, said Shinar, as the application process can be long and tedious and detract from time that is needed to get a business off the ground and up and running. Beyond that, many small business owners may have “had negative experiences with credit card debt,” said Shinar, which might make then skittish about coming back to that market.
Yet stepping back and looking at things from a high level, Shinar stated that the business optimism can be traced to the overall economy with its strong numbers, “whether it is from the monetary and fiscal policy that creates more jobs” — even as small businesses are tied to a larger percentage of that overall job creation. Deregulation also seems to spur optimism, he added, with recent news surrounding changes looming (possibly) to the Affordable Care Act and other regulations also adding to optimism.
Drilling down a bit, into Fundbox’s own customer base, said Shinar, the energy companies have been displaying is a relatively lower level of optimism, and service companies are showing higher levels, a trend that can be traced back several months.
Data Point Two: 46 percent
This is the percentage of businesses that use personal credit cards as a way to gain access to credit. Said Shinar, “There is no such thing as a real business credit card in the U.S. All of them are personally FICO-based, and they try to pretend to be business cards,” he added, rattling off the names of cards offered by Chase, Capital One and others. His own firm (and officers) experienced onerous processes to get corporate cards, including locking up significant amounts of cash in order to qualify and receive those cards.
Conversely, “if you are running [an] $100 million hedge fund or a hotel chain, you are going to be able to get a corporate card.” Personal credit is easier to utilize, said Shinar, since many small business owners already have a personal credit card in hand when they establish their firms. But personal credit cards have their limits, he continued, as owners cannot pay salaries using those cards, and neither can they pay rent. And many suppliers and vendors, he said, do not take credit cards. As has been well-documented in B2B, money changes hands through actual checks or ACH transfers.
But absent that 46 percent mentioned above, he said, more than 50 percent of small businesses are looking for new credit opportunities, “so the demand is there,” but the marketplace is limited.
Data Point Three: 20 percent
This is the percentage of small businesses that the National Small Business Association said are denied access to business credit. Shinar contended that the actual numbers are much higher than that. The statistics are reflecting personal credit applications that are going to be used for business credit, so for a small business owner who goes to a bank and applies for credit, “there are two scenarios. One, they are going to say no, that your business is not qualified.” But those same lenders might say in the same breath, “‘we like you, and you have been a good customer. We are going to lend you personal credit, and you are going to use your business as collateral.’”
At a large bank, he said, anything below $1 million wouldn’t be considered a business credit. A smaller community bank might say that anything below $150,000 is too small to be considered a line of business credit. In addition, lenders need to meet capital adequacy requirements, which, in turn, mandate that they keep a certain amount of money on the balance sheet, which could truncate the ability to offer more credit lines.
Lending thus comes down to the small business customer experience, and, as Shinar stated, there is a wealth of data available, digitally, to help smooth the lending process. Business owners and consumers are getting used to the idea of sharing data, he said, so long as they get some benefit out of it.
Fundbox connects to the small business data sources. Data can be far flung in nature, said Shinar, ranging from accounting software to bank accounts to CRM system data. That data is used to reconstruct the business network, to look at customers and at suppliers and to explore how risky they might be — and what the business environment may be, in terms of where growth may lie.
“We care about all the traditional metrics,” Shinar told Webster, “except one: Your personal credit score … most small businesses, especially in the early days, are maxing out their credit limits on the credit card, and that is not because they are not responsible, but because that is the only way” to ensure cash flow and keep the business running at first — and later, the loans (especially those extended by Fundbox) go to pay for everything from growth to satisfying tax payments.
For Fundbox itself, the average amount extended to a small business comes in at $10,000, with credit lines in place ranging from $10,000 to $100,000, with automatic reviews every few months, along with attendant increases. Even customers initially declined through the Fundbox platform, said Shinar, get credit after a new attempt a few months later due to business performance.