The Rising Cost of Small Business Borrowing: How CFIs Can Help

In the 1950s, the US small business lending landscape was much simpler, and a healthy dose of grit and resilience could take aspiring business owners a long way. A great example is Walmart, which started as a small discount store in Arkansas. With limited capital and a modest $20K loan, Walton’s ability to access affordable credit was key to his success.Today, small and medium-sized businesses (SMBs) still need affordable capital, but high interest rates, inflation, and tightening regulations are making the cost of borrowing prohibitive.For community financial institutions (CFIs) who want to meet these businesses’ needs, the evolving SMB lending environment presents an opportunity to flex their relationship-building muscles. By offering personalized loan structures, faster approval processes, and fintech partnerships, CFIs can help small businesses access the capital they need while differentiating themselves from larger banks and nonbank lenders.The Shift Toward Alternative LendingThe growing demand for SMB financing is evident in the increased volume of SBA loan approvals over the past few years, with SBA loan volume rising 22% YoY in 2024.Despite this growth, there are far more SMBs that would like financing, but feel too discouraged to apply. About 44% of SMBs did not even apply for loans last year because they believed they would either not qualify or be denied, due to the current tightened lending standards.Many SMBs are unable to access SBA loans due to several challenges:

While the total approved loan amounts for SBA loans have increased, the application process remains lengthy, and many businesses face difficulties meeting the qualification requirements. As a result, many SMBs are turning to alternative lenders such as fintechs and nonbank lenders, even though those have their own disadvantages compared to traditional bank loans. Nonbank lenders tend to charge higher fees than traditional bank loans, with interest rates ranging from 3% to over 60%, depending on the type of loan. Despite the high cost, however, many SMBs feel they have no choice but to rely on alternative options as SBA and traditional loans remain out of reach for the vast majority. Small Business Lending ChallengesGiven the barriers to accessing traditional financing, many SMBs hesitate to take on new debt. A recent PYMNYS Intelligence survey reveals why: 35.4% cite high fees and interest rates as the biggest obstacle, while 19.2% point to difficulty meeting eligibility criteria. Additional barriers include low credit limits (13.9%) and high repayment amounts (13.8%), explaining why traditional financing options, like SBA loans, remain out of reach for most.

Source:  PYMNTS
Accessing financing quickly is also a critical issue for many SMBs. The average time to find a loan varies significantly depending on the lender. While traditional banks can take anywhere from 60 to 90 days, online and alternative lenders can fund loans in as few as 1 to 7 days. This stark contrast in loan processing times is one of the key reasons many SMBs are opting for faster alternative lenders despite higher costs.Indeed, the 2024 Small Business Credit Survey found that only 14.6% of loans were approved by big banks, in no small part due to overly long processing times. For businesses operating on tight margins or in seasonal industries, long wait times for loan approvals are simply not feasible.How CFIs Can Stand Out in the Evolving LandscapeDespite the many challenges facing SMBs that need flexible and affordable capital, CFIs have a unique opportunity to thrive by offering flexible, personalized solutions that better meet the needs of SMBs than large banks and nonbanks. Here are a few strategies that can help CFIs distinguish themselves:

CFIs and SMBs Should Be Fast FriendsAs the cost of borrowing remains high and access to capital continues to be a challenge for many small businesses, CFIs have a unique opportunity to become the trusted financial partner that SMBs can rely on for flexible, efficient, and affordable financing solutions.By offering personalized service and faster approval processes, CFIs can stand out in an increasingly competitive market, while also maintaining the affordability that many alternative lenders lack.Leveraging fintech partnerships can also allow CFIs to integrate advanced technologies and data-driven solutions that streamline lending processes, reduce operational friction, and deliver faster access to capital. By combining the personal touch of relationship-based banking with the efficiency of fintech, CFIs can position themselves as the go-to resource for SMBs navigating today's challenging lending environment for years to come.