Bank closures this past spring, combined with once-in-a-generation high interest rates, have left SMBs wondering where and how to get the financing they need to stay solvent in challenging times. While big banks have long had competitive rates and excellent tools, Capterra’s 2023 Financing Survey of over 450 SMB leaders found that only 39% of SMBs today feel confident turning to large or international banks for financing. In fact, 43% report that the recent banking crisis will fundamentally change how they approach traditional financing options—such as opening up a line of credit or taking out a loan—in the future.
Adding fuel to the fire, the Federal Reserve raised the interest rate an eye-watering nine times in the past year, going from 1.5% to 5.25% in just over a year. Despite the potential gains on interest bearing accounts, 64% of SMBs are withdrawing some or all of their funds from their primary banking institutions in light of recent closures.
Economic factors and historic requirements make financing harder than ever for SMBs
Large banks scrutinize everything from a company’s credit score to its financial statements. They also run risk assessments and analyses based on an organization’s market and industry to ascertain creditworthiness.
These stringent parameters make obtaining traditional financing especially difficult for SMBs. In fact, 56% of SMBs report that they have been denied financing more than once within the last two years due to factors that include lack of collateral, poor cash flow, or a credit utilization ratio that is too high or low.
While the biggest challenge for SMBs seeking financing today is high interest rates (50%), the next biggest blocker is the complicated application process (38%)—a problem with a more easily reached solution. If SMBs cannot meet the bar for financing through big banks, alternative financing provides another path.
Alternative financiers empower SMBs with quick, accessible funding and more
Compared to large or international banks, alternative financiers—such as small or regional/local banks, Community Development Financial Institutions (CDFIs), or merchant cash advance providers—generally have more flexible lending requirements, which can help SMBs access funding more quickly.
Alternative providers have also become more attractive lending partners in light of recent banking closures. Currently, only 14% of SMBs still prefer large or international banks to alternative lenders. And while the source of financing has changed, SMBs still prefer traditional funding options, such as opening up lines of credit or credit cards, taking out a personal or SBA loan, or applying for a grant.
Though they might lack some of the strengths that large or international banks bring to the table, such as regulatory stability or a comprehensive suite of financial services, alternative financing partners offer SMBs a variety of advantages beyond fast and flexible funding:
- Access to niche and specialized funding: Alternative financers can provide customized financing solutions for SMBs in specific markets or industries, such as renewable energy projects, where traditional lenders may lack understanding and expertise.
- Service for underserved markets: Alternative financiers such as CDFIs work with underserved markets or demographics to foster economic and community development in low-income areas.
- Access to non-traditional funding sources: Alternative financiers can go beyond traditional banking channels and connect SMBs with venture capitalists, angel investors, crowdfunding initiatives, and government grants or subsidies.
Software and expanded SBA solutions can give SMBs a leg up in the lending process
The Small Business Administration (SBA) has modernized and expanded its lending programs, making the process of obtaining financing, which can get complicated quickly, easier for SMBs. These programs offer a range of government-backed loans, lines of credit, and loan modifications tailored to SMB needs, with an expanded list of lenders to choose from.
And although more than three-fourths (78%) of SMBs partner with a third-party service, like an accounting firm, to help them apply for or obtain funding, many businesses also look to technology— such as budgeting and forecasting, cash flow management, and loan origination software—to assist in the process.
Navigating the financing process can be complex for SMBs, but it doesn’t have to be
Given the volatile banking climate, it might not be in SMBs’ best interest to partner with large or international banks to acquire funding. Whether it’s working with an alternative lender or using software, there are a variety of options for SMBs to choose from that can ensure that their business has the capital needed to move forward into 2023 with confidence.
Max Lillard is a senior analyst at Capterra, covering accounting and finance. Capterra is the world’s largest software and services marketplace that helps businesses make the right technology decisions to empower growth.
Banks stock image by Andrii Yalanskyi/Shutterstock
