From American Banker: There's a hidden barrier making the small-business financing gap worse
"There's a hidden barrier making the small-business financing gap worse"
In order to succeed, every small-business owner needs access to capital — but the small-business financing gap is getting worse. Last year, only 52% of small businesses that applied for financing received the full amount of funding they requested, down from 62% in 2019.
The reasons for the small-business financing gap are complex. One of the most overlooked factors is that many small-business owners do not have the financial acumen to navigate the complexities of business finance, administrative and legal needs — leading to frustration, higher costs due to mistakes and potentially, failure. When it comes to seeking capital, they must assess loan options and risk without critical expertise.
To ensure more small businesses can secure the funding they need, we must treat business coaching as a critical part of the capital-readiness equation. When paired with lending, coaching helps small-business owners assess financing needs, navigate the loan process and use capital effectively once secured.
Consider: Nearly 70% of community development financial institutions, OR CDFIs, which provide affordable financing to small businesses in low- and moderate-income communities, say borrower qualifications were a limiting factor in their ability to meet demand. In a Mastercard Strive USA survey of small-business experts, all respondents said pairing business coaching and lending was one of the best ways to improve opportunity for small businesses.
In practice, integrating lending and business assistance could look like this: If a small-business owner is turned down for a loan, they would receive financial counseling for next steps and alternative options, such as credit building. Post-loan, business coaching can help small-business owners effectively utilize financing, maximize profits and minimize defaults.
Yet, integrating coaching with lending is complicated. Banks, community lenders, and small-business support organizations often operate in isolation, with few formal systems for sharing insights or coordinating efforts at scale. Even within integrated institutions like many CDFIs – where lending and coaching coexist – internal referrals are frequently hampered by friction and departmental silos.