As vaccine rollouts continue across the globe, there’s growing optimism that life will return to some sort of normalcy in the coming months. But while restaurants may get busier and sporting events a little fuller, there’s still a long way to go before countries make a full economic recovery. In the U.S., there are still millions of people out of work, and while the unemployment rate has fallen dramatically since the start of the pandemic – from 14.8% last April to 6.4% today – it’s still two percentage points higher than it was before the COVID-19 crisis began.
While America’s $1.8-trillion stimulus package will certainly help the U.S. economy stay afloat, life can’t get back to normal until small businesses do. Entrepreneurship is the lifeblood of any economy, and especially in the U.S. where small businesses create two-thirds of net new jobs and account for 44% of U.S. economic activity. In December, the U.S. Census Bureau found that 53% of businesses don’t expect to return to pre-COVID-19 operation levels for at least six months, while Yelp says that 60% of pandemic-related closures in the U.S. are now permanent.
“We’ve seen Covid-19 really expose that lending and access to capital is still highly manual and highly inequitable. Enormous amounts of capital had to be deployed to worthy businesses quickly and we were very imperfect in that”, said FISPAN CEO, Lisa Shields in a recent ZDNet interview, adding “I think Covid-19 is going to force the banks to adopt fintech partnerships that can help them meet that demand more accurately and fairly and provide loan decisions in near-real time.”
Fewer loans for entrepreneurs
There’s one key reason as to why U.S. small businesses have been hit so hard: they can’t get the loans they need to help keep them afloat. Why? Because over the last decade, banks have pulled back on small business lending in favour of giving more to the big players. A Wall Street Journal (WSJ) article found that in 2007, banks held about $721 billion in small business-related loans and commercial mortgages. That number had fallen to $680 billion by 2019, while loans and mortgages to larger companies more than doubled to $2.82 trillion.
Banks are more focused on larger institutions in part because it costs the same amount of money to process a $100,000 loan as it does a $1-million loan. As well, many community banks have shut their doors. One study found that the community banks’ share of U.S. banking assets and lending markets dropped to 20% in 2015 from more than 40% in 1994. While the government’s Paycheck Protection Program (PPP) did pay out $525 billion in forgivable loans to small operations, it wasn’t enough – these companies always need a steady stream of dollars to help them weather economic ups and downs.
Look to nonbank lenders
It’s unlikely this trend will reverse course anytime soon – if anything small business owners could find it harder to take out loans as their financial struggles increase. The longer it takes to return to normal, the harder it will be to restart their operations.
So, what can they do? One option is to circumvent the traditional bank. There are a number of newer fintechs that are trying to fill this lending gap, such as Lendio and Bluevine. Amazon and Shopify are also rolling out lending platforms for their small business clients, with the latter allowing customers to repay the loan through a percentage of future sales.
Over the next several years non-bank lending is expected to dramatically increase. According to one study, in 2018, two larger online lenders, Kabbage and OnDeck, each lent more than $2 billion to small businesses, while PayPal, which is now a big player in the small business loan space, loaned $4 billion. During COVID-19, Lendio approved $8 billion in PPP loans through its platform, while many others connected entrepreneurs with financing, too.
Increase access to financial information
While it’s great news that fintechs want to fill this funding hole, it can still take time for applications to be approved. Why? Because traditional banks, which still hold most small business assets, are reluctant to share the kind of details needed with fintechs to make this process easier. If there was a way for online lenders to instantly and easily access customer information from other financial institutions, loans would not only come faster, but interest rates, dollar figures and other features could be more tailored to a business’s specific needs.
At some point, the U.S. will need to embrace open banking, which allows third-party financial service providers, such as fintechs, access to crucial client information that they can then use to deliver better products. There are also some fintech providers, such as FISPAN, which help banks more easily connect to their small business clients’ ERP programs. Using APIs, FISPAN’s technology allows both small and large businesses to get more financial functionality out of their bank’s system, which then gives them more flexibility with their dollars. For this to work, small businesses must talk to their banks to see if they’re using FISPAN’s services, and if not, push them to get it.
It’s going to be a long road to economic recovery, especially if small businesses don’t get the financing they need to hire, pivot and restart their operations. For business owners, seek out non-bank alternative lenders and talk to your financial institutions to see if they have fintech in place that can help you get the money you need.
To find out more about how open banking can help, read our recent white paper, How Open Banking Can Jumpstart the U.S. Economy.