By Matt Brewster, Vice President of Capital, Hello Alice
The financial health of small businesses is holding back the nation’s economic growth and prosperity. Financial institutions that can crack the code on meaningful partnerships with small business owners to improve their financial health are poised to reap the benefits.
The Importance of Small Business Financial Health
The greatest challenge facing small business owners is their financial health. Nearly 9 out of 10 small employers experienced some financial challenge in 2021, according to the Federal Reserve’s Small Business Credit Survey. Challenges with rising costs, managing cash flow, and difficulty accessing capital put small businesses at risk. Financial challenges prevent owners from growing revenue, hiring employees, and building wealth for their families and communities. In the worst case, it means that they shut down — half of small businesses fail within the first five years of operation, according to data from the Bureau of Labor Statistics.
Now is a critical time to fix our small business financial support infrastructure. The Census Bureau reported in January that more new businesses (10.5 million) have formed in the past two years than in any two years in recorded history.
Financial Institutions That Support Financial Health Will Win
When businesses close or their growth is hindered, their bank partners lose a customer or miss an opportunity to grow that relationship. With the very high cost of new small business customer acquisition, these institutions have a financial interest in sustaining and increasing the financial health of their customers — to say nothing of the broader economic impact and community benefits.
In the past decade, partnerships and financial technology breakthroughs have given banks and other financial institutions the tools to build holistic, long-term relationships with their small business customers. Here’s how I predict that banks will evolve to holistically support the financial health of their small business customers in the next decade.
Deeper Engagement in Creative Ways Will Holistically Support Business Health
Most small businesses view their bank as simply the provider of a commoditized service. They typically use basic depository services and maybe one or two other products over the years. They select a bank based on cost, capabilities, and convenience.
Banks are trying hard to shift this perception and behavior, and some are using creative strategies. Bank of America built a Small Business Resource Center with educational content on business finances, such as selecting the proper accounting methodology. Others have deepened engagement through partnerships. Chase offers Curated Business Coaching through a partnership with The Acceleration Project. In addition to providing valuable insight to customers on improving their business’s financial health, these solutions deepen engagement with banks’ brands, build trust, and strengthen customer relationships.
Alternative Underwriting Using New Data Will Increase Access to Capital
Most small businesses had unmet financing needs in 2021, according to the Federal Reserve data. This includes nearly a quarter of businesses that didn’t get the full amount that they applied for (including those that were declined outright) and more than one-third that didn’t apply because they are debt averse or discouraged.
Large banks had the lowest rate of approval among all lenders in 2021. While banks are still the most common place small business owners go for financing, their market share is quickly eroding. Approximately 40 percent of financing applicants applied to a non-bank lender in 2021. Online lenders have driven much of this growth with quicker decisions and higher approval rates. Some of the difference in approval rates between banks and non-bank lenders is simply risk appetite. But that’s often an oversimplification. Many fintech lenders are using new data sources like open banking, sales data, and accounting data to gain insights on businesses’ creditworthiness rather than simply relying on a business owner’s personal credit score and a personal guarantee. Banks are leaving money and relationships on the table.
In the years ahead, banks will be forced to carefully evolve the credit underwriting models to use existing and new data sources in new ways. This will decrease unmet financing needs and can ultimately boost businesses’ financial health.
Corporate Focus on the New Majority Will Bring Financial Health Into Greater Focus
Small business financial health is also an issue of economic equity. According to the JPMorgan Chase Institute, nearly half (47 percent) of small businesses typically have two weeks or less of cash on hand, which may be surprising on its own, but the rate is two to three times higher for Black- and Hispanic-owned businesses. New Majority entrepreneurs — a group that includes women, people of color, veterans, people with disabilities, and the LGBTQ+ community — face unique, systemic barriers to accessing capital.
COVID-19 and our country’s ongoing racial reckoning have prompted corporate leaders, including bankers, to make commitments to address racial inequalities. What’s different about this new wave of bank commitments is the implementation at some institutions.
Traditionally, banks (and other corporations) have focused solely on making money and relied on philanthropic contributions to the nonprofit sector to ameliorate any negative social impacts of their business practices. Some new bank commitments — including JPMorgan Chase’s $30 billion Racial Equity Commitment, Bank of America’s $1.25 billion Commitment to Advance Racial Equality and Economic Opportunity, and Wells Fargo’s Banking Inclusion Initiative — have significant core business commitments to reaching underserved New Majority entrepreneurs.
For example, part of Chase’s $30 billion commitment includes a promise to lend $2 billion to small businesses in neighborhoods with a BIPOC majority. This has already led to significant changes in how the bank serves its customers, including staffing senior business consultants in 21 cities to provide financial and other advice to 2,600 BIPOC-owned businesses so far. I think that we’re only beginning to see the pace of corporate change catch up to their leaders’ commitments.
Looking down the road, I’m most excited by the promise of using data, technology, and creativity to support small business financial health. I’m encouraged by banks’ growing recognition that authentically supporting financial health, not just selling products and services, is the key to strong customer relationships and the future of small business banking.
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