In the wake of the financial crisis, banks’ pullback from small- to medium-sized business (SMB) lending yielded a flood of technology-driven players stepping in to fill the SMB credit gap.
Entrepreneurs today have more choices than ever before as to how and where they access financing, but in many ways, that journey to capital hasn’t gotten any easier.
According to Nav’s newly-appointed CEO Greg Ott, the current market sees an estimated $4 trillion in SMB debt origination each year. Much of that financing, however, is facilitated through inefficient processes that can heighten costs, limit transparency for borrowers, and increase risk for lenders.
“This is a really chaotic, and extremely inefficient, ecosystem,” Ott told PYMNTS’ Karen Webster in a recent interview. “It’s amazing how much of the industry still operates with fax — it’s expensive, and it’s wasteful.”
Even as digital-first financing platforms step in, Ott warned that SMBs continue to face obstacles that hamper their ability to access affordable capital.
“The proliferation of alternative lenders has made it more confusing for the small business owner, and often times it makes it easier to fall victim to a more expensive loan than they would have had to take,” he said.
The result is that businesses will frequently have to make a decision between affordability and convenience, he explained. A Small Business Administration loan is often the most affordable financing available for an SMB, yet this long-term loan requires an arduous application process. Ultimately, the cheapest option for SMB funding may not be the best fit, Ott said.
The Close Ties of Cash Flow and Funding
As a platform designed to assess and display an SMB borrower’s most appropriate financing options, from cards to loans, Nav positions itself as a facilitator of transparency for SMBs. But there’s more to understanding the right funding fit for SMBs than simply the size of a loan they seek.
One of the largest obstacles for borrowers today, he said, is that the search for capital is often circumstantial. A business may be struggling with late-paying customers, or operating in an off-season, and need quick cash to get it over a rough patch. In this case, a paperwork-heavy traditional application process for a long-term loan, although often more affordable than online lending, won’t be the best option.
“A lot of this is really about cash flow issues, and cash flow can get really lumpy,” said Ott. “Price is a factor, but that’s one of the challenges that banks have in their analog model. Small businesses don’t have the time to take four hours out of their day to put on a suit, walk into a bank and cross their fingers to get financing.”
Ott highlighted Nav’s positioning as a data platform to aggregate information on SMBs beyond their size, industry and borrowing needs.
Taking into account an SMB borrower’s business credit score can help that company shift toward funding sources that will help reduce that borrower’s reliance on a personal credit card to fill short-term capital gaps, for instance.
Analyzing a borrower’s business partners can shed light on late-paying customers to not only meet funding needs as more SMBs sell on trade credit (causing an estimated $3.1 trillion stuck in accounts receivable, according to PYMNTS research) but make more informed decisions about which firms to do business with based on their historical payment habits.
All of this information has significant impacts on the health of cash flows, which causes ripple effects throughout an SMB’s network.
“It’s the old story about how a small business sits down at the end of the month, not to pay their bills, but to figure out which bill they’re not going to pay right now,” Ott said of the knock-on effect of late payments. “That’s the challenge in the ecosystem that affects other small businesses.”
An Ecosystem Approach
By incorporating more data to support and analyze borrowers’ cash flows, Ott said Nav can also better serve the lenders themselves in its ecosystem approach to facilitating SMB finance. But addressing SMB lending friction isn’t just about connecting borrowers and lenders at the moment an SMB needs capital, he said.
Increasingly, developing an ecosystem post-financing has become a critical component of promoting healthier cash flow among borrowers and mitigating risk for financiers.
Developing a network of service providers in areas like point-of-sale (POS) terminals, business insurance and beyond further promotes the health of an SMB borrower, noted Ott. Further, that ecosystem approach accelerates SMBs’ digitization journeys, leading to more high-quality data to fuel transparency and risk mitigation for SMBs, lenders and their service providers.
It’s all a part of a self-servicing circle of the SMB funding environment, where everyone is interconnected and impacted by the success (or demise) of an SMB borrower.
“What’s important is that the small business owner has insights into what paths they can take to improve the options they have,” said Ott. “It becomes a win for the ecosystem because healthy businesses become healthy borrowers.”