Smaller SMBs face a heightened risk of financial exclusion

Only 54% of US small- and medium-sized businesses (SMBs) with revenues of less than $100,000 say they have sufficient access to credit, according to a new LexisNexis report.

Reasons Why Smaller US SMBs Aren't Applying For Loans

Business Insider Intelligence

The report is based on a survey of 305 owners and authorized agents of SMBs who’ve applied for funding in the past three years or intend to do so in the next three years. Despite the significant shortage in credit, owners of these smaller SMBs are also significantly less likely to apply for loans than other SMBs: Only 24% of SMBs with revenues below $100,000 applied for a loan in the past three years, compared with 53% of SMBs with revenues of over half a million.

Here’s why these SMBs have been holding off on loan applications in the past three years:

  • The majority (66%) of smaller SMBs that haven’t applied for loans think they won’t be approved. While there’s likely a variety of reasons why these businesses think they’ll be rejected, such as previous experiences, this perception appears to be well founded: 47% of smaller SMBs that have applied for a loan in the past three years have been rejected.
  • Among the remaining 34% that haven’t applied, the biggest barrier cited is a lack of commercial credit history. This suggests a lack of understanding from these SMBs about the shifts we’ve seen in the credit market in recent years. A slew of fintechs, like LendingClub, are leveraging technologies like AI to overcome the limitations presented by conventional methods for determining creditworthiness, including thin credit history.

That smaller SMBs are struggling to get funding is a major problem for the US economy — but for fintechs that play their cards right, it’s a huge opportunity. In the US, 99.9% of businesses are SMBs and almost 60 million workers, 48% of the total workforce, are employed by these businesses, per data from the Small Business Administration.

As such, ensuring that these businesses have the capital to help them scale and continue operating is important for the country’s economy. Yet this shortage of funding, despite its negatives for these SMBs, is a boon for fintechs: Players like Kabbage, LendingClub, and OnDeck, which have developed alternative models for assessing credit, can scoop up these underserved businesses. However, as the data above highlights, it’s crucial these fintechs get the message across that thin credit files aren’t necessarily a barrier for loan approvals if they want to tap these players.

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