Digital Innovations Help Cash-Strapped Small Businesses Find Best-Fit Funding Solutions

The past few years have been full of challenges for small- to medium-sized businesses (SMBs).

“It is definitely a perfect storm, and not in a good way,” Anthony Peculic, head of BaaS and Card, FinTech Banking at Cross River, told PYMNTS.

“Small businesses at this point are challenged to find funding sources given that cost of capital is at its highest, interest rates are sky high, and banks and other service providers are tightening up their own offerings,” Peculic said. “And that’s not to mention the challenges that SMBs are facing from their own consumers who are dealing with similar macro pressures.”

During the pandemic, SMBs relied on financial support, such as the Paycheck Protection Program (PPP), to navigate the crisis. As these resources dried up, they faced rising inflation and interest rates, making traditional funding sources less accessible and affordable.

But while access to funding is a critical factor for the success and growth of SMBs, PYMNTS Intelligence in “What’s Next in Credit: How Lack of Credit Access Impacts SMBs,” a Cross River collaboration, found that 6 out of 10 SMBs are denied access to the funding they need.

Traditionally, SMBs have used a variety of financing options, from corporate credit cards to loans and even home mortgages. These sources allowed businesses to manage their capital expenditures and operational costs efficiently.

“What has happened now is those things are gone,” Peculic said. “Mortgage rates are 8% and up, credit cards are available, but credit lines are lower than they were … it is starting to crunch on SMBs and prove to be challenging.”

The Changing and Challenging SMB Lending Landscape

The constraints on SMB funding sources are intensified by rising inflation and interest rates, making it difficult for SMBs to secure the capital they need, and these ongoing challenges are intensified by underwriting practices that may not adapt well to the unique requirements of different businesses and a lack of credit history for many SMBs.

While certain companies, particularly more successful ones or those that are venture-backed, are going to be able to find financing regardless of the macro environment, many Main Street businesses have had to “get creative” in finding funding sources, Peculic said.

“It’s important to think outside the box when offering different solutions to these small businesses,” he said. “It goes beyond financing, which is critical, but also touches on things like cost reductions which can lead to more capital and a better bottom line.”

He said many SMBs need to both raise more money and cut down on their expenses to survive.

That’s why innovations in funding solutions are vital for addressing the evolving needs of SMBs, particularly digital products.

“What has happened in the industry is you either have large corporate financing solutions, or you have consumer lending products, and small businesses get lost in the middle,” Peculic said. “If you think about a pizza shop, versus a consulting firm, versus another business, they each have very different needs.”

The Role of Digital Solutions in Evolving Lending Products

Some of the more promising digital SMB lending solutions that are having an impact across the funding landscape include alternative credit scoring, predictive modeling, real-time data and industry-specific solutions, Peculic said.

Digital solutions can use alternative credit scoring methods to evaluate the creditworthiness of SMBs beyond just traditional credit scores, providing a more accurate assessment of business potential.

Similarly, predictive modeling can help lenders make informed decisions by analyzing historical data and using advanced analytics to identify suitable financing options.

“We have to think as an industry, ‘How do we get more money into the hands of businesses that are legitimate and have a lot of promise?’” Peculic said.

Underpinning these emergent solutions is access to real-time data, which is crucial for the informed decision-making necessary to assess a business’s financial health and make timely financing decisions.

What does the Cross River leader see happening in the funding landscape’s future?

“I want to see more industry-specific solutions,” Peculic said. “It is also important to support businesses more broadly, helping them manage their money and providing more tools beyond just financing solutions is crucial.”

As the FinTech industry continues to evolve, he said, it will play a crucial role in supporting and empowering SMBs, which, in turn, drive economic growth and prosperity.