September 21, 2022

Become Part of the SMB Funding Solution

Help your customers thrive by offering much-needed small business financing.

Did you know that nearly half of all start-ups go out of business within the first five years? Sad, but true. Using data from the U.S. Bureau of Labor Statistics (BLS), analysts calculate that about 20% of new SMBs fail during the first two years in business, 45% during the first five years, and 65% never make it past 10 years.

So, why is the SMB survival rate so low? CB Insights recently analyzed 101 start-up post-mortems and narrowed down the leading causes of failure to 20 culprits. It turns out that “running out of cash” is the second most common reason start-ups and small businesses fail after "no market need."

You might be wondering why entrepreneurs won't save their cash-starved businesses by simply taking out a small business loan. Many would actually love to, but unfortunately, it’s not so easy for SMBs and start-ups to get favorable and timely business financing.

The Problem with Small Business Financing

Difficulty in securing financing is just one of the many financial challenges for SMBs, and it’s a big one. Many successful businesses, large and small alike, rely on external funding to get through tough times and fuel their growth. But the financing approval rate for small businesses is discouragingly low, especially in big banks. According to the Federal Reserve’s Small Business Credit Survey, about 37% of small businesses applied for financing in 2020, of which only 14% got all the money they needed. Meanwhile, 47% of businesses chose not to apply for financing despite needing funds.

A majority of small business owners fund their enterprises using money from their personal savings and earnings, which is often barely enough to sustain the business. Although bootstrapping is still a genuine cash source, it’s always a bit of a gamble.

Here’s a look at the main reasons why it’s so difficult for SMBs to get external financing and why some entrepreneurs are averse to business lending:

Limited financing options

Unlike large firms, small businesses have somewhat limited options when it comes to financing. While this is not entirely true, some business owners might see it this way because of their over-reliance on traditional banks and lending institutions. Most banks and credit unions have a stiff and limited range of offerings, mainly term loans and lines of credit, which may not be suitable for small businesses.

Alternative (non-bank) lenders, on the other hand, often have a wide range of funding products specially designed for small enterprises. But for one reason or another, some borrowers might prefer to take their chances with big banks anyway (we’ll see why).

Images by Loanspark

Strict qualifying and approval criteria

Business lenders require borrowers to meet specific standards in order to qualify for financing. Such measures are necessary to evaluate the borrower’s lending risk — their ability or capacity to repay debt. Borrower-qualifying criteria generally vary between lenders and financing products. But here are the top five approval factors that pose huge financing obstacles to many small and new businesses.

  • Good business credit – First-time borrowers may not have any business credit at all.
  • Substantial revenue – Many small businesses and start-ups have rather erratic cash flows and sales trends.
  • Business maturity – Young businesses (under two years) may not qualify for financing.
  • High-value collateral – Pledging loan security is a tall order for SMBs with a limited inventory of assets.
  • Convincing business plan – Overly ambitious entrepreneurs with radical business ideas or targeting high-risk niches can have a hard time bargaining for funding.

Predatory lenders

Predatory lenders are unscrupulous individuals or loan shops that impose unfair, costly, or deceptive financing terms on innocent borrowers. They take advantage of the borrower’s lack of financial knowledge or desperation to pass products that do more harm than good. These lenders seek nothing more than to profit from borrowers.

Bad lenders mostly operate online or as non-institutional companies, giving alternative lending a bad name. The fear of falling prey to such lenders might keep some entrepreneurs from exploring options beyond the reassurance of known banks.

The law is a bit hazy regarding fairness in business lending, although the government is slowly zeroing in on predatory lending practices. For instance, Congresswoman Nydia M. Velázquez recently introduced the Small Business Lending Disclosure Act of 2021, which aims to protect small businesses against unfair financing under the Truth in Lending Act (TILA).

Unrealistic repayment expectations

In a 2020 survey, only 21% of SMBs reported having zero outstanding debt. But debt is not necessarily a bad thing in business. It only becomes a problem when the borrower can’t pay it off. For instance, Bloomberg reports that thousands of small businesses are still struggling to clear the Paycheck Protection Program (PPP) loans they took in 2020 during the COVID-19 pandemic. The outstanding debt totaling about $28 billion is proving a heavy burden on the affected entrepreneurs still seeking forgiveness from the Small Business Administration (SBA).

While unavoidable circumstances can lead small businesses to default on debts, lenders are sometimes to blame for placing unrealistic repayment obligations on less-than-capable businesses. Some lenders award loans blindly without considering the borrower's repayment capabilities as per the loan agreement. Such a loan inevitably cripples the business’s cash flow; this is one of the ways SMBs end up in a perpetual debt cycle.

Fear of bad debt

A combination of bad lenders, strict qualifying criteria, and chances of default can make business financing seem confusing, frustrating, and even dangerous to a small business owner. Such perceptions blur the lines between bad and good debts, forcing many entrepreneurs to reject the idea of external funding altogether. We saw earlier in a survey that nearly half of SMBs in need of cash refused to apply for financing simply to avoid debt.

Images by Loanspark

How to Become Part of the Solution

As the Small Business Administration (SBA) puts it, “Small businesses are the lifeblood of the U.S. economy.” Small businesses generate 44% of the country’s economic activities, employ millions of Americans, and churn out countless consumer goods and services. Ironically, the same small businesses that die in the thousands each year due to lack of funding are an essential national economic pillar.

Fortunately, your business can become part of the solution to this problem. Any B2B company can become a much-needed source of funds for its customers by partnering with a co-branded Business Lending-as-as-Service provider such as Loanspark. With Loanspark’s highly trained teams of financial experts, innovative technologies, vast financial marketplace, and over 20 years of industry experience, you’ll be able to offer easy, quick, and helpful lending solutions to small businesses looking for a financial boost to grow and succeed.

We’ll do this by optimizing your lending offer for the target borrowers and providing it to your customers through our powerful online platform. The beauty of co-branding is that you retain control of all these processes, and the final financial product will still bear your brand name.

Contact Loanspark to learn more about how your organization can become part of the solution to helping our SMB communities grow by providing them with the much-needed funding they deserve.

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