Small Businesses Lose Vital Financing as Banks Struggle to Verify Who They Are

A solo dental practice in a small town. A mom-and-pop Italian restaurant in a large city. Or a one-of-a-kind hair salon somewhere in between. Tiny, independently owned businesses with fewer than 10 employees and, typically, brick-and-mortar storefronts are a bulwark of private-sector entrepreneurship that contributes significantly to local and national economies. But these pint-sized enterprises are also the most likely to be choked off from financing that could help them survive, thrive and grow — and for a surprising reason.

Nearly 3 in 10 micro-business applications for bank credit in the United States and the United Kingdom are rejected because the lender can’t confirm their basic data, according to a forthcoming PYMNTS Intelligence report in collaboration with Markaaz, an Austin, Texas, company that enables lenders to verify the identities and financials of small businesses worldwide and assess the risk of lending. Despite operating in a digital-first world where data is everywhere, micro-enterprises face a rejection rate that’s five times higher than for larger enterprises.

Why? Whether it’s a national bank, smaller financial institution or local credit union, lenders routinely complain that they struggle on their own to ascertain the validity of a micro-company’s basic corporate and financial details. The black box carves a straight path to, at best, stalled approvals for loans or credit, at worst, higher rejection rates.

Obtaining financing is just one of the hurdles many micro-businesses face. High interest rates, changing consumer trends and, more recently, supply chain snarls heightened by global tariffs all combine with a business owner’s ability to successfully gauge demand for their niche services or products.

But even before President Donald Trump’s global trade war, small U.S. businesses, which include micro-enterprises, already faced a shorter life span. Just 1 in 4 stay in operation for 15 years, and nearly half fail after five years, the most current data from the Small Business Administration shows. The reasons range from running out of cash and flawed business models to misgauging market demand and operational snafus.

Across the pond, where 95% of all businesses are micro-enterprises employing 3 in 10 of all workers, 20% of all small business fail within the first year of operation — what U.K. officials call the business “death rate” — and 6 in 10 go belly up within the first three years, according to one estimate.

Seeing Through the Blind Spot

But what if some of those companies were fundamentally solid and could have thrived had they been approved for financing?

That’s where the opportunity for lenders emerges.

Micro-sized firms, by their very nature, present a paradox: They are often too small for cost-effective manual review, yet too opaque for automated scoring, leaving them in a financial “blind spot.” This predicament isn’t just a nuisance; it means fundamentally creditworthy businesses can be either rejected outright or face increased risk pricing on credit products.

The solution: Data from independent sources, like credit bureaus and auditors, that is obtained and validated by third parties. That gets around the problem of asking the business (the fox) just who is minding the store (the henhouse).

What’s the incentive for lenders? The forthcoming report shows that robust micro-business credit assessment can double lender profitability and improve approval and delinquency rates.

Banks with very or extremely comprehensive underwriting for small and medium-sized businesses (SMBs) report 84% profitability in this segment, while those with less comprehensive assessments see that figure plummet to less than half. The high rejection rate for micro-businesses due to unverifiable legitimacy (27% in both countries) contributes to approval rates falling sharply as business size decreases — from 95% approval for enterprises to far less for micro-businesses. The report is based a survey conducted March 4–April 2 of 350 banking executives in the U.S. and U.K., including leaders at credit unions, community banks, regional banks, large national banks and digital-only institutions that serve small businesses.

True, delinquency rates for the smallest firms are higher (2.6% for micro-businesses, compared to 0.6% for enterprises). But this may reflect a lender’s inability to accurately assess risk due to data deficiencies, rather than to inherent higher risk in the enterprise. On the one hand, some lenders may be extending credit without properly vetting credit risk. But other smaller businesses may be penalized for failing to provide data that proves their creditworthiness, rather than for the actual risk they pose — a gap the third-party solutions fill.

Key takeaways:

• The high rejection rate for micro-businesses (27%) is primarily a data quality issue, stemming from missing, unclear or unvalidated information, rather than an inherent lack of creditworthiness.

• Banks prioritize access to trusted, real-time, third-party verified data (such as audited financials and debt repayment history) to confidently underwrite loans, as it impacts profitability and approval rates.

• Addressing the data challenge requires technological solutions for scalable, real-time data access that can ensure more informed financial decisions for micro-enterprises.

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