As Big Banks Fall, SMBs Turn to Alternative Funding

As big banks collapse amidst inflation and rising interest rates, small and midsize businesses (SMBs) are disproportionately impacted as loans become more difficult to secure. Capterra's 2023 Financing Survey of over 450 SMB leaders conducted in April reveals that only 39% of businesses feel confident turning to large or international banks for financing. Moreover, 43% of organizations say these banking closures will fundamentally change their future approach to traditional financing.

The top challenges SMBs currently face when seeking financing are high-interest rates (50%) and a complicated application process (38%), among other hurdles like working in a risky industry or already carrying too much debt. They are turned down because of a lack of collateral, a credit utilization ratio that is too high or low, and poor cash flow. Unfortunately, 56% of businesses have been denied financing at least once within the last two years.

A vast majority of businesses are currently operating on the funding they've obtained within the past two years, and 63% report that this financing will only last anywhere from three months to less than a year.

Given these challenges, it's no surprise that SMBs have changed their perspective on government regulations and enforcement: More than half of SMBs feel the need for more federal regulation and enforcement of the banking industry. Further, 64% withdrew some or all of their funds from their primary banking institution as a result of banking closures.

"Whether it be with a large or international, online, or smaller regional/local bank, SMBs should always ensure that their money is at an FDIC-insured bank," says Max Lillard, senior finance analyst at Capterra. "Businesses should carefully consider how much money they need, how quickly they need funding, and their business's qualifications, as different lenders come with different eligibility requirements and financing options."

Regional and local banks, CDFIs or other community lenders, and merchant cash advance providers are emerging as alternate traditional financing partners. The average SMB loan sought from big banks sits at around $600,000, while with these alternatives, it averages between $25,000 to $100,000. This differs from what SMBs need, as more than half of them seek between $100,000 to less than $1 million of funding.

Applying for and obtaining any form of financing, whether from a traditional lender like a large or international bank or an alternative partner like a CDFI, can quickly get complicated. Hence, SMBs are turning to technology for help with financing. To determine creditworthiness, they are using software for cash flow management (48%), budgeting and forecasting (37%), or loan origination (32%).

The Small Business Administration (SBA) has freshly modernized and continues to expand their lending programs, which can be good alternative funding options for SMBs that are looking beyond large or international banks for support. Through initiatives like their Community Advantage loan program, organizations can tap an expanded list of lenders: Certified Development Companies (CDCs), non-federally regulated CDFIs, and more.

For more tips on financing for SMBs and a plethora of software and services options, visit Capterra.com. Read the full survey findings for actionable insights on how growing businesses can overcome financing challenges.

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