Many small- to medium-sized businesses (SMBs) struggle to keep their doors open, even as they have emerged from the business disruptions caused by the pandemic. Ongoing inflation and rising costs for everything from goods and services to staffing are taking their toll, increasing business costs. Nearly 1 in 10 SMBs that generate less than $1 million in annual revenue are at risk of closing, although the risk of potential closure varies across market segments.
To avoid business closures and position themselves for growth, many SMBs with depleting short-term working capital look to outside financing to address their business needs. Yet, access to credit has become more challenging for SMBs despite the availability of multiple options. In July, 39% of SMBs reported having readily available business financing sources, a drop from 42% in April. SMBs are most likely to use corporate credit cards, yet many rely on the owners’ personal financing sources. SMBs with access to business financing and personal sources, however, are more apt to believe their businesses will grow.
“What’s Next in Credit: How Lack of Credit Access Impacts SMBs,” a PYMNTS Intelligence and Cross River collaboration, examines SMBs’ interest in financing during economic uncertainty when many face possible closure. We sourced data from Main Street Health Q2 2023: Credit’s Key Role in SMBs’ Plans and Main Street Health Q3 2023. For Main Street Health Q2 2023, we surveyed 514 firms generating less than $10 million in annual revenue between April 10 and April 28. For Main Street Health Q3 2023, we surveyed 509 firms generating less than $10 million in annual revenue between July 5 and July 21. This study explores the challenges SMBs face in accessing the credit they need to support and grow their businesses.
Key Findings
SMBs face an elevated risk of closure and are particularly vulnerable during economic disruption.
SMBs are especially vulnerable during tough economic times, with as many as 24% considering themselves at risk of closure in November 2020 at the height of the pandemic. In the current economic environment, nearly 10% of SMBs generating less than $1 million in annual revenue said they are at risk of closing their doors.
As of July, 9.9% of SMBs generating annual revenues of $150,000 or less reported they were at risk, down from 14% in April. Among those generating revenues between $150,000 and $1 million, 9.3% said they were at risk of closure, up from 7.7% in April. Larger SMBs — those generating revenues between $1 million and $10 million — were more stable, with 4.8% identifying themselves as at risk in July. They also saw a slight uptick from 2.8% in April. The variation across firm size highlights how tighter short-term working capital and limited financing options challenge smaller firms.
The risk of potential closure varies across market sectors, suggesting that some industries have less working capital and less access to financing. Concern about closure is highest in the finance and insurance industries, where 22% of SMBs reported being at risk of closing. Manufacturing and arts and entertainment SMBs reported higher than average closure risks, at 16% and 13%, respectively. The restaurant and retail sectors clocked in at 11% and 10%, respectively. In contrast, 6.2% of construction and utilities and 4.2% of real estate, rental and leasing SMBs said they were at risk of closing their doors, indicating that these sectors continue to have access to outside financing and even growth despite continued economic uncertainty.
SMBs struggle to access credit, especially traditional funding from banks.
Access to business financing remains SMBs’ biggest challenge, as many find it increasingly difficult. In April, 42% of SMBs reported having access to business financing sources. These sources included cash in the bank or access to cash in the form of loans, credit cards or investment assets, all readily available if they needed it for their business. By July, this share dropped to 39%.
Larger SMBs — those generating revenues between $1 million and $10 million — may be more financially stable, yet they also found access to financing increasingly challenging. In July, 46% of larger firms said they had access to business financing, a drop from the 59% who said the same in April. The smallest firms, however, had it worse. Twenty-eight percent of SMBs generating revenues of $150,000 or less had access to business financing in July. With traditional bank funding increasingly less accessible, there is a substantial opportunity for FinTechs to provide SMBs with credit and other financing.
Among market sectors, retail trade saw the most significant drop in access to funding, with a 6 percentage point reduction from 43% in April to 37% in July. Meanwhile, hospitality increased 10 percentage points from 28% in April to 38% in July. This difference in access to funding suggests that the hospitality industry has benefited from rising consumer interest in travel as pandemic-related restrictions lift, and retail continues to struggle more than other sectors. Yet, with traditional bank funding increasingly less accessible for most industries, there is a substantial opportunity for new players — i.e., FinTechs — to enter the field and improve SMBs’ access to credit and other financing.
Corporate credit cards are the type of credit that SMBs use most often, but many SMBs rely on the owners’ personal credit sources and assets.
SMBs have diverse funding sources to manage and grow their business, including working capital and unsecured bank loans. Yet, they are more apt to hold and use corporate credit cards than any other form of business financing. While 28% of SMBs hold corporate cards, 15% said they actively use them. Among SMBs generating revenues less than $150,000, 22% have access to business cards, as do 33% of SMBs generating revenues between $150,000 and $1 million. In contrast, 1.1% to 2.1% of SMBs reported using other forms of business financing, such as business loans from online lenders, working capital loans from banks or equipment financing.
SMBs often rely on personal financing secured by the owner, indicating that access to business financing is difficult for many SMBs. Including business and personal financing, personal credit cards rank as SMBs’ second-most used, at 9.3%. SMBs also use other financing: 5.7% rely on personal loans from banks; 2.3% liquidate personal investments; 2.2% use loans from family members or friends; and 0.8% rely on mortgage loans. As so many SMBs rely on personal financing, there needs to be a broader approach to accessing business credit outside of what traditional banks offer.
SMBs with access to financing are more likely to grow and are better prepared to ride out tough economic conditions.
Despite less access to business financing, SMBs seem to fare better when using a combination of personal and business credit. For one, SMBs with access to business and personal sources of financing are more likely to believe their businesses will grow. While 64% of SMBs with access to both sources of credit expected revenues to grow, 50% of those with just personal credit sources expected revenues to grow.
Moreover, SMBs without business credit are more likely to feel the impact of inflation. Forty-four percent of businesses without credit access cited inflation as the top challenge they expect to face. In contrast, 37% of those with access to business credit said the same. The fact that both personal and business credit use enables SMBs to grow their businesses and cope with inflationary pressures indicates how important it is that SMBs have better access to business credit. This access means an increased availability of business financing — if not from traditional banks, then from other sources, such as FinTechs and digital-only banks.
Conclusion
In the current economic environment, SMBs in all market sectors continue to face serious challenges to their survival. Access to credit is crucial for the success of businesses facing a risk of closing, an all-too-common reality for many. SMBs also have difficulty accessing the business financing they need, so many rely on personal credit. Those with access to business and personal financing sources are more confident that their businesses will grow, suggesting a need to increase SMBs’ access to business credit to help them ride out financial ups and downs — and ultimately grow.
Since SMBs have been less able to access funding from traditional banks, there is an opportunity for FinTechs to step up and fill the gap. Such alternative business credit sources can be nimble enough to improve SMBs’ access to financing solutions while managing risk.
Methodology
“What’s Next in Credit: How Lack of Credit Access Impacts SMBs,” a PYMNTS Intelligence and Cross River collaboration, examines the challenges SMBs face in accessing lines of credit to support and grow their businesses. We sourced data from Main Street Health Q2 2023: Credit’s Key Role in SMBs’ Plans and Main Street Health Q3 2023. For the Main Street Health Q2 2023, we surveyed 514 firms generating less than $10 million in annual revenue between April 10 and April 28. For the Main Street Health Q3 2023, we surveyed 509 firms generating less than $10 million in annual revenue between July 5 and July 21.
