Card Payments Data Unlocks Small Business Credit Opportunities

Main Street is the soul of America, making small and medium-sized businesses (SMBs) its heart.

That’s why it is worrisome that many Main Street SMBs are increasingly pessimistic about the economy and their own business prospects.

But it’s not all bad news.

“Everyone’s been talking about an impending recession for months, but we haven’t entered one,” Charles Zhu, vice president of product at data intelligence platform Enigma, told PYMNTS. “Businesses are nervous — but we’re more entering ‘stagflation,’ in the sense that inflation is staying high but nominal growth in most businesses is also staying quite high.”

Zhu noted that the SMB segment is incredibly diverse and resilient. “The Main Street economy is continuing to chug along, even though there is a lot of anxiety out there,” he said.

Supporting his comments, new 2023 PYMNTS research in the “Main Street Health Q1 2023: Using Finance to Ease Recession Fears,” a collaboration with Enigma, finds that barely more than a quarter of SMBs (26%) have access to the equivalent of at least 60 days’ worth of revenue in financing. Additionally, more than 4 in 10 SMBs (43%) say that reining in inflation is the single greatest issue they face.

Fortunately for small businesses, future-fit financing solutions and modern payment technologies are revolutionizing the increasingly cashless business operating environment by providing new funding routes for cash-strapped SMBs.

SMBs Turn to Next-Gen Financing Solutions

Zhu underscored that consumers are continuing to “really move away from cash,” creating a payments vacuum that “certain payment systems and techniques, including BNPL (buy now, pay later),” are filling.

“The big story continues to be that people are not using cash as much — we’re not going back to what cash percentages looked like before, and payment processors are playing an increasingly and accordingly important role in the SMB economy,” Zhu said.

He emphasized that this ongoing transformation has resulted in an “explosion” in the “amount of financing, and the kinds of financing” now available to SMBs.

“One thing that has just taken off are merchant cash advances, which have become an important source of financing for SMBs as continued inflation from a business and operational perspective remains one of the top macro concerns for small businesses,” Zhu said. “Data shows that SMB revenue growth isn’t necessarily keeping pace with nominal growth, and the increased prices along their supply chains aren’t going into SMBs own pockets.”

Still, while the last few years have thrown a “ton of wrenches” into the SMB operating environment, Zhu underscores that entrepreneurs will always “stay resilient” and find ways to succeed no matter the headwinds.

Read more: Only 26% of Main Street Businesses Have Access to 60 Days of Cash

Credit Cards Becoming the Universal Payment Method

“While we’re seeing SMBs start to be able to plug funding gaps using short-term financing mechanisms, it’s not as though they are spending on anything that is wildly out of the ordinary — it’s still your typical business and operational elements, but it is just much easier to access capital and there’s much less friction,” Zhu said.

He added that closing the mid-size loan funding gap around short-term working capital needs like replacing a broken piece of equipment or making payroll is “helping SMBs stay afloat and stay in business for longer.”

Merchant cash advances are typically secured using a merchant’s future card processing volumes, and Zhu emphasized that “credit cards as a share of spend is going to continue increasing.”

“There hasn’t been a single year where card transaction volume has decreased,” he said, noting that “cards are becoming the universal payment method.”

What this means, Zhu says, is that there now exists an increasingly valuable and actionable trove of timely data that can help support SMBs’ financing needs.

“One big problem in the data space is that data gets stale really quickly — so a lot of information firms may be using to make credit decisions or monitor their portfolio, can be outdated and irrelevant to the contemporary situation,” he said, adding that as financial institutions shift from a growth focus to more portfolio monitoring and risk mitigation strategies, access to relevant and fresh data is becoming more important.

“[With fresh data] small business lending increasingly gets closer to what consumer lending looks like, making access to capital for SMBs more transparent and with less friction due to the role of data in assessing financial health,” Zhu said.

He added that from a macro perspective, increasing seamless access to capital for SMBs will help create a “small business Utopia” in the U.S. and drive innovation.

“It indicates that the American Dream is alive and well.”