Young SMBs Can’t Find Enough Business Financing

Working capital is the lifeblood of businesses of all sizes, and to those companies just starting, access to financing can mean the difference between stagnation or being able to grow.

The lack of financing sources limits companies’ ability to undertake expansion plans and sometimes makes it difficult to carry out their daily activities. This vulnerability is greater among small and medium-sized companies (SMBs) and those sectors with little or no access to readily available financing.

Financing Availability by Segment

According to PYMNTS Intelligence research, the number of financing sources SMBs need to run their business is higher than those available. This lack of financing is particularly concerning in some specific business segments, with young and smaller companies most severely affected.

For instance, those companies with less than three years of activity and those with less than $150K in revenue want 26% more financing than what is available. These companies typically have lower credit ratios, making it harder to access financing sources.

Other sectors with difficulties meeting their financial needs are construction and utilities. In both cases, construction and utility companies typically need greater capital investment than other industries due to the very nature of their business. This means financing, and there is a 20% difference between financing sources wanted and those available in this segment.

This ratio is 18% in the hospitality sector, more than double the overall average but still behind construction or utilities. However, the lack of financing in this sector may be particularly damaging compared to others. The hospitality business landscape is composed of a vast majority of small companies, many of which have suffered significant sales and profitability cuts during the past few years. As a result, many of them remained in a weak financial situation, and the lack of financing sources to run their daily businesses made them more vulnerable in times of economic uncertainty.

Alternative Financial Sources

Many firms look to alternative sources to fill these lack-of-financing gaps. To be more specific, nearly one-quarter of SMBs have used personal credit cards to finance their business, and more than 15% have leveraged personal loans from a bank to face business contingencies. When only 18% of companies, on average, have cash equivalent to 60 days of revenue and the lack of business financial sources is limited, personal sources become the only alternative.

About the Numbers

“Main Street Health Q2 2023: Credit’s Key Role in SMBs’ Plans,” is a collaborative research series between PYMNTS Intelligence and Enigma. This edition examines the availability of financing options for SMBs, which are considered the preferred sources by Main Street SMB companies to help them run their business, covering both expected and unexpected expenses.