Can Non-Traditional Data Sources Close the Funding Gap for Main Street?

Small and medium-sized businesses (SMBs) have a big problem — their access to capital is shrinking.

A historically underbanked segment, it is becoming more difficult for SMBs to borrow as the economy tightens and macro conditions worsen.

This, as ongoing contractions across the Main Street landscape have only put more pressure on business owners’ working capital and operational cash flow needs as they are forced to navigate both interest rate hikes and rising inflation, all after having endured the crippling years of the pandemic.

One would think there would be some time for businesses to catch their breath. Still, time is money, and new 2023 PYMNTS research in the “Main Street Health Q1 2023: Using Finance to Ease Recession Fears,” a collaboration with Enigma, finds that nearly three-quarters of SMBs (74%) don’t have access to the equivalent of at least 60 days’ worth of revenue in financing, while 17% have no access to emergency funds at all.

Compounding the uphill battle facing SMBs, the turmoil around regional banks has only increased the financing challenge, as lenders have become more cautious about extending capital to SMBs with limited credit history, higher risk profiles, or inadequate collateral due to worries about their own funding and deposits.

Still, hope springs eternal and a modern suite of emergent, data-driven financing options are being brought to market to help meet the working capital needs of Main Street SMBs.

Read More: Main Street Merchant Recession Expectations Match Fed, Consumer Sentiment

Main Street Resiliency Faces Yet Another Stress Test

“Inflationary conditions are still real and still relevant, and companies need to react to that,” James Ritter, CFO at ABBYY, told PYMNTS in a March conversation. “I think [dealing with inflation] is still the highest priority for a lot of companies.”

That’s because, in an inflationary period, where cash availability is increasingly pinched by the limited purchasing power of customers and merchants, short-term needs like replacing a broken piece of equipment or making payroll after experiencing a sudden drop in consumer spending can prove to be fatal.

The fact that many Main Street SMBs would be unable to continue operating for long if their cash flows were disrupted underscores the urgency of leveraging new, flexible financing solutions to overcome ongoing borrowing troubles.

But it can be challenging for SMBs to find lenders or financing options that are a good fit for their needs.

Small businesses, often key pillars of their communities, have historically been met with limited options for obtaining working capital, particularly those operating in more niche and harder-to-serve industries or businesses located in more rural areas.

PYMNTS data shows that the smallest Main Street SMBs are also the most at risk of closure in the event of a cash flow shortfall. The smaller the business, the less likely it is to have ready access to emergency financing options.

Fortunately for these businesses, future-fit financing solutions and modern, increasingly cashless payment technologies are revolutionizing the SMB operating environment by providing new funding routes for cash-strapped Main Street merchants.

See Also: Card Payments Data Unlocks Small Business Credit Opportunities

Tapping Digital and Leveraging Data to Close the SMB Funding Gap

PYMNTS has for years been tracking the modernization of payments systems and capabilities as businesses move away from legacy, often manual back-end processes.

This transformation is creating more data around SMBs operations, simultaneously creating more transparency around their financial health – making it easier for lenders to underwrite and extend credit to Main Street businesses.

“[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,” Charles Zhu, vice president of product at data intelligence platform Enigma, told PYMNTS.

Access to innovative financing solutions geared toward SMB needs is only growing more important, Zhu emphasizes, because “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.”

Even those SMBs making millions of dollars in annual revenue still face challenges finding financing in today’s environment. PYMNTS research shows that four in 10 SMBs with $1 to $10 million in annual revenue (40%) are operating without access to readily available emergency financing to help them survive a sudden drop in sales or another adverse event.

That’s why tapping payment data and other operational information to establish a clearer picture of both cash needs and business health is critical for closing the SMB funding gap and keeping Main Street and the communities it supports healthy.