Digital Banks Fill Gaps in Small Business Working Capital Loans

As working capital from traditional lenders evaporates, SMBs are seeking fresh funds from digital channels.

That’s according to PYMNTS and NCR’s report “Digital Banking Rises To Meet SMB Needs,” which showed that as SMBs raised prices last year to meet higher supplier and operating costs, many if not most believe they’ve hiked prices as far as possible to remain competitive, hence the scramble among SMBs for new sources of working capital from non-traditional sources.

“The pressure to find the right working capital solution is increasing, with one survey finding that big banks’ approval rate for business loans dipped to just below 15%, a 10-month low,” per the study. “Alternative lending saw the biggest increase at nearly 2%, meaning small businesses are increasingly looking to FinTechs and digital-first offerings to deal with cost pressures.”

SMBs need capital to cover costs, including — somewhat ironically — the digital tech that assists with efficiency and operational improvements. According to the report, 24% of SMBs are concerned with finding affordable funding, creating an existential threat for many owners.

Noting that traditional banks don’t usually offer online account opening or lending for small businesses and that the “current process can take one to two weeks and requires a visit to the bank” to apply for a small business loan, anxious SMBs are turning more to digital sources.

PYMNTS research has found that 75% of SMBs with working capital needs are the most likely to use a digital-only bank as their primary financial institute (FI).

Awareness of borrowing options is crucial for pressured SMBs, and the report noted that six in 10 (60%) are not getting that information from traditional FIs, so they’re going online.

“SMBs are seeking guidance on several fronts hoping to improve their financial health. Inflation motivates 60%, ongoing supply chain issues move 44%, and talent shortages and acquisition prompt 36% of SMBs to go to their bank for support,” per the report. “Bank executives realize there is a support gap, however, with a mere 9% of bankers saying their digital customer experience was ‘excellent.’”

Get the report: Digital Banking Rises To Meet SMB Needs