By Laurel Nelson-Rowe
The trend is beginning to give these businesses, sometimes called the “underserved in funding,” improved access to working capital and cash flow management resources, along with better experiences obtaining that access.1 Such funding resources can make a thrive-or-die difference for SMEs, as insufficient or underestimated capital and poor cash-flow management have been cited as reasons for small business failure.2 U.S. Small Business Administration (SBA) statistics indicate about 50 percent of new businesses fail in the first five years.3
SMEs generally pursue financing for everyday operations and/or growth. Many seek monies to expand their physical or digital footprint. Cash flow assistance can help SMEs pay for rent, utilities, inventory, manufacturing, marketing and sales, employee salaries, and benefits.
But small enterprises can face myriad challenges when seeking funds from traditional bank lenders. Loan collateral and credit histories can be barriers. Existing debt and poor business performance can present obstacles.4 It can take too much time to find the right loan product, apply, and then wait for the lender to approve and distribute funds. Sometimes, the resulting loan can be less than the business needs. Stringent borrower qualifications, cumbersome processes and banks’ small business risk aversion may all be factors in the continued decline of bank loans to small businesses since 1995, and especially since the great recession.5
Between SMEs’ needs and their challenges in obtaining loans, experts see a financial fissure. As research firm NPD Analytics put it in a May 2018 report, “The credit gap is one of the top challenges for small businesses, especially those with less than $1 million in annual revenue.”6
B2B payment providers, however, may be able to help SMEs close that gap. B2B payment platforms have access to all kinds of data about business transactions, from payment histories, to sales and shipping volumes, and more. Consequently, they can analyze that data to look at overall business health and how well SMEs manager finances. They could examine business partner profiles, supplier quality, bounced checks, accounts/payment performance, and other business management data.7 When partnering with lenders, that data can be used to gain new kinds of insights into a business’ creditworthiness, assess risk, and make lending decisions more rapidly.
B2B payment platform PayPal’s Working Capital program provides loans to merchants based on sales history data, among other factors. It gives SMEs an opportunity to obtain working capital loans without a credit check. Loan repayments are made automatically from sales revenue; initial loans cannot exceed $125,000.8
Another B2B payment platform, Stripe, has said it is building a payment ecosystem, adding Funding Circle as its first “verified extension partner” for lending. Once verified, Stripe’s partners can gain access to the Stripe customer base and data.9 SME customer data on the Stripe platform, including sales and overall business performance trends, can populate a Funding Circle loan application. Creditworthiness is assessed, and loans up to $500,000 could be made available to SMEs.10
Major e-commerce platforms, meanwhile, have similar access to extensive data about the small businesses that sell through them, and have begun to leverage that data to offer loans to those SMEs. In doing so, they become a kind of one-stop shop, taking on the role of both B2B payment platform and lender.
According to research firm CB Insights, for example, Amazon invites its third-party merchants to apply for loans after compiling and analyzing a host of business performance factors on that merchant, mostly derived from customer transactions that flow through the e-commerce platform. It also gathers and analyzes “tertiary” data—user reviews, sentiment, etc. With a pre-populated loan app and quick approval, an SME can lock-in low interest rates and automated payback. Marketing and promo perks are sometimes part of the deal.11
Meanwhile, eBay has reportedly partnered with credit card and e-payment processing start-up Square. By accessing eBay merchant data, Square Capital has said it can offer a “seamless funding experience” for loans from only $500 up to $100,000 to enterprises seeking to grow on eBay.12
Of course, traditional small business loan criteria, such as an owners’ personal credit history and scores, are still being factored into B2B lending analyses. But a recent Federal Reserve analysis concluded that with the use of new systems and analysis of additional business metrics, low credit scores and minimal credit histories no longer present barriers for SMEs “as long as the borrower can show revenue sufficient to be tapped for [loan] repayment.”13
According to the NPD Analytics report, partly thanks to these trends lending to U.S. small businesses by five leading online lenders surged 50 percent over two years, to $3.9 billion in 2017 from $2.6 billion in 2015.14
B2B lending providers and lending partner options for SMEs are on the upswing given the emerging ability to analyze a host of new kinds of business data. These new options can break down barriers to financing for small businesses, potentially providing loans more rapidly and easily—as long as the business can stand up to such close scrutiny of its operations.
Laurel Nelson-Rowe is a longtime writer and editor focusing on business technology, cybersecurity, media, corporate culture, and quality management.
1. “Square Partners With eBay to Expand Small Business Lending,” CNBC; https://www.cnbc.com/2018/07/24/square-partners-with-ebay-to-expand-small-business-lending.html
2. “Why Small Businesses Fail: Top 7 Reasons for Start-up Failure,” Business Know How: https://www.businessknowhow.com/startup/business-failure.htm
3. “Frequently Asked Questions About Small Business,” SBA; https://www.sba.gov/sites/default/files/advocacy/Frequently-Asked-Questions-Small-Business-2018.pdf
4. “The Small Business Credit Survey,” Federal Reserve Banks of New York, Cleveland and Richmond; https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2018/sbcs-nonemployer-firms-report.pdf
5. “The Economic Benefits of Online Lending to Small Businesses and the U.S. Economy,” NDP Analytics; https://static1.squarespace.com/static/52850a5ce4b068394a270176/t/5b0ff5c003ce6436bf0c80e6/1527772609277/Online+Lending+May+25+2018.pdf
7. “Where B2B Payments, Banking And Lending Connect,” PYMNTS.com; https://www.pymnts.com/new/b2b-payments/2018/small-business-lending-banking-prepaid-card
8. “PayPal Working Capital Business Loans Review,” MagnifyMoney.com; https://www.magnifymoney.com/blog/small-business/paypal-working-capital-small-business-loan-review626404172/
9. “Stripe expands its ecosystem into lending, adds Funding Circle as a partner,” Tearsheet; https://tearsheet.co/payments/stripe-expands-its-ecoystem-adding-funding-circle-as-a-partner/
10. “Funding Circle to Provide Access to Loans for Users of Stripe,” Crowdfund Insider; https://www.crowdfundinsider.com/2019/01/143638-funding-circle-to-provide-access-to-loans-for-users-of-stripe/
11. “The 7 Industries Amazon Could Disrupt Next,” CB Insights; https://www.cbinsights.com/research/report/amazon-disruption-industries/)
12. “Square Partners With eBay to Expand Small Business Lending,” CNBC; https://www.cnbc.com/2018/07/24/square-partners-with-ebay-to-expand-small-business-lending.html
13. “Browsing to Borrow: ‘Mom and Pop’ Small Business Perspectives on Online Lenders, The Federal Reserve, https://www.federalreserve.gov/publications/files/2018-small-business-lending.pdf
14. “The Economic Benefits of Online Lending to Small Businesses and the U.S. Economy,” NDP Analytics; https://static1.squarespace.com/static/52850a5ce4b068394a270176/t/5b0ff5c003ce6436bf0c80e6/1527772609277/Online+Lending+May+25+2018.pdf