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‘Not moving in any direction is worse than the wrong direction’: How banks can kickstart lending to small businesses

  • With the right products and services, small businesses are becoming a promising revenue stream
  • But with little experience with SMBs, a lot of incumbents still struggle to service them
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‘Not moving in any direction is worse than the wrong direction’: How banks can kickstart lending to small businesses

Small businesses may have faced a lot during Covid, but they’ve also grown in numbers. 

While the pandemic left a lot of people jobless, it also left them with more time on their hands, and a fresh opportunity to buckle down and get their entrepreneurial dreams afloat.

In 2020, the number of startups in the US reached 4.4 million — a 24% increase compared to the 3.5 million startups that existed the year before, according to a report by Peterson Institute for International Economics. This is the sharpest increase in startup formation documented to-date. 

In addition, over a year and a half into the pandemic, we’re starting to see SMB optimism climb once more. 58% of small businesses expect revenue to increase in the next year, according to the 2021 Q3 edition of U.S. Chamber of Commerce Small Business Index.

With a cocktail of these types of stats popping up, SMBs are becoming an increasingly promising sector for financial service providers to bank. 

But for incumbents, tapping into this market hasn’t been easy. Historically, SMBs have been a gamble for banks. And today, that leaves them with little experience in providing financial services for these types of companies.

“From a lending perspective, it costs the bank the same amount of money to make a $50 million loan as it does a $50,000 loan. So it’s really hard to justify allocating resources,” said Kathryn Petralia, co-founder of Kabbage, a small business lender, at Tearsheet’s recent Convergence Conference . “And it’s not because they’re bad guys, it’s because it’s hard to do.” 


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