2024 Global Digital Shopping index

Small Businesses Look for New Options as Traditional Funding Shrinks

Smaller firms feel the credit crunch — and are likely to pivot to new avenues of financing.

PYMNTS Intelligence shows that six in 10 smaller firms are denied funding through traditional conduits: loans issued through financial institutions. In tandem with those denials, it turns out that businesses’ demand for those loans may be waning, too.

The Kansas City Fed reported recently that small business commercial and industrial lending continued to decline in the second quarter, decreasing 16.8% from the same period in 2022 and 1.2% from the previous quarter.

Banks, said the Fed, “reported declining loan demand for the fifth consecutive quarter, with the largest percentage of respondents reporting a decrease since the survey began.”  The latest lending data show that new commercial and industrial credit lines were down more than 13.6%. The latest readings show, too, that approval rates at large FIs stood at 48% in the most recent quarter, down from a peak of around 70% seen in the midst of the pandemic.

The Pressures are Mounting

As detailed here, the impact of rising rates has been such that a rising tide of smaller firms are filing for bankruptcy.

Coming into the end of the second quarter, PYMNTS Intelligence found that nearly half of Main Street small- to medium-sized businesses (SMBs) plan to either boost the amount of credit they access or start tapping credit if they’d not yet done so in the year ahead.

The chart below details where these firms intend to source their financing. Traditional banks lead the pack at about a third of SMBs. Online lenders come in at a bit more than a quarter of respondents.

SMBs, credit sources

SMBs may be driven by a sense of urgency, as only 26% have access to the equivalent of at least 60 days’ worth of revenue, and 17% have no ready access to emergency funding.

The fact that smaller firms want to interact with banks and online lenders as their top choices for funding opens the door for these same firms to offer alternative financing — particularly short-term financing options that help SMBs triage their working capital, gain the funding they need to purchase inventory or pay bills, and navigate current macro headwinds.

Among recent examples of alternative financing is Galileo Financial Technologies’ recent partnership with Mastercard. The collaboration enables banks and FinTechs to extend Galileo’s buy now, pay later (BNPL) offering, via Mastercard Installments, to small businesses. Those loans, tied to virtual cards, are meant to be paid out to help smaller firms pay expenses and fund their operations and are paid back over four installments.

And in another example, as reported earlier this year, Walmart has teamed with Citi, bringing the Bridge built by Citi lending platform to Walmart’s roughly 10,000 U.S. suppliers, classified as SMBs, offering loans of up to $10 million.